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Volatility Index Surges on Japan Outlook

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Options prices and bets on higher equity volatility jumped from Tokyo to Frankfurt and Chicago as investors sought protection against stock-market losses amid concern that the risk from radiation leakage at a power plant in Japan is increasing.

Businessweekreports The Chicago Board Options Exchange Volatility Index, or VIX, climbed 15% to 24.32 Tuesday, its highest close Aug. 31, 2010. The VStoxx Index, which measures options on the Euro Stoxx 50 Index, rose 16% to a three-month high of 31.01. Swap contracts that gain with higher volatility rose the most since May, according to data compiled by Bloomberg and Deutsche Bank AG.

Demand for protection surged after falling to the lowest level in more than three years in December, when the global rally in stocks was approaching a two-year anniversary. The Standard & Poor’s 500 Index has gained 90% since March 9, 2009, as central banks around the world kept interest rates at record lows and companies beat earnings estimates.

“Welcome back to equity risk,” said John Farrall, who helps oversee $106 billion as director of derivatives strategy at PNC Wealth Management in Cleveland. “A lot of the better strategists were frustrated that they were selling umbrellas in summer a few weeks ago when no one wanted protection.”