This paper focuses on one of the most important issues in finance, especially while modeling high-frequency data: the volatility of financial markets. Risk management (VaR, especially stress testing and worst case scenario models), asset pricing and particularly option valuation techniques are the areas where the concept of volatility estimators is of crucial concern. Our intention was to find the best estimator of true volatility taking into account the latest investigations in finance research. Based on the methodology designed for the CBOE Volatility Index - VIX (VIX White Paper, 2003) the similar estimator of realized connected with implied volatility for the Polish index WIG20 option data, with all necessary amendments, was calculated (VIW20). The VIX quoted on CBOE is currently the best measure of investment risk perfectly revealing the level of investors’ fears and emotions. The concept of a volatility index is based on Derman’s methodology (Derman et al., 1999), which incorporates the volatility surface taking into account volatility simile and its term structure in the construction of this index. We calculate VIW20 – the volatility index for the WIG20 index, based on the high-frequency data (tick data) for WIG20 index options for the period: X.2003 to V.2007, i.e. from the moment of the introduction of index options on the Warsaw Stock Exchange. After a detailed analysis, the VIW20 revealed some predictive power in forecasting the extremes of the markets. Additionally we present the analysis of the influence of the VIW20 based instruments on the possibility of construction of the index portfolio with minimum risk and on the quality of derivatives portfolio risk management, where the volatility and liquidity risk play a crucial role. The main aim of this paper is to create the background in emerging markets for the introduction of adequate volatility indexes and subsequently volatility derivatives, taking into account an essential correction of the methodology necessary because of strong inefficiencies of these markets. The introduction of such instruments will contribute to the development of these markets by enabling active risk management, taking into account these risks which are currently very hard to hedge (vega hedging, liquidity risk). In the last section we show the advantages for the WSE, being one of very few emerging markets with investment risk adequately quantified and where you can manage this risk with volatility derivatives.