S.Korea bourse to unveil fear gauge this yr - source

SEOUL, Oct 21 (Reuters) - The Korea Exchange plans to introduce an index this year to measure investor fears and market volatility, a senior official at the bourse operator said on Tuesday.

The new index is designed to gauge investor jitters and market volatility through fluctuations in option prices.

The index would be similar to Wall Street's favourite measure of investor fear, the Chicago Board Options Exchange Volatility Index .VIX, or VIX, which recently hit a record high.

"We have made the index and been in an observation period to check how it functions, before an announcement later this year," the official said, adding the new measure would be based on one of the bourse's indexes.

He declined to be identified or give further details until a public announcement was made.

The Korea Times reported on Tuesday that the index would be provided on a real-time basis with regard to a Korean option, citing an unnamed exchange official. The newspaper said the exchange would come up with the index next month.

The daily said the official refused to specify which option would be a benchmark.

Securities companies have pushed the stock exchange to set up a volatility index to help them price derivatives products such as warrants better, as market volatility has increased following the U.S. subprime mortgage crisis last year.

Investors use volatility indexes to protect themselves against sharp movements in spot prices.

The VIX tracks projected stock market volatility based on near-term S&P 500 index option prices and typically moves inversely to the S&P benchmark.

In South Korea, Seoul shares and the KOSPI 200 December futures index <KSZ8) have both lost 36 percent this year based on Monday's close. (Reporting by Kim Yeon-hee; Editing by Jonathan Hopfner and Anshuman Daga)