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British Pound Futures Volatility Forecast (10/05/2011)

The last week we forecasted a drop of British Pound futures whilst our profit target was set to 163.5 – 164 and our forecast proved accurate and profitable once again. In fact, the market opened at 166 dropped to 164.8 and closed even lower at 163.6 on Friday. A very successful trade!!!

The current volatility is around 0.45% (7.1% annualised) but the TGARCH plot shows a quite strange curve because although futures prices plummeted throughout the entire week the oscillation rate did not change much and remained almost stable trading in the same range.

Particularly, the curve did not react at all to the price crash and it seems that the conditional variance even diminished signalling a clear divergence between the price and investors ‘sentiment.   Nevertheless, the stable volatility should be carefully interpreted because, at least in this case, the great drop in volume and the apparent steadiness of the conditional variance seem highlighting a great instability. In other words, it is the calm before the storm.

The HyperVolatility team remains bearish on this market because British Pound futures should plummet again and touch the 161.5 – 162 level area accompanied by a steady recovery of the US dollar whilst the volatility should augment and test the 0.55%- 0.57% level (8.7% – 9% annualised). We will place some short positions as soon as an increase in volatility will give us the entry signal.

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