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German Bund Futures Volatility Forecast (10/04/2011)

The last week we forecasted an ulterior price drop which would have dragged Bund futures prices towards the 120.5 area and effectively so it was. Specifically, futures prices opened at 121 settled at 120.5 for a couple of days and then plummeted to 120.07 euro the last Friday.

However, we were expecting a bit of upside movement since the volatility curve was clearly downward sloping but this was not the case, although the actual volatility is around 0.3% (4.7% in annual terms).

The conditional variance will probably mean-revert towards the 0.33% – 0.35% area (5.2% – 5.5% annualised) bringing more volatility in the market and therefore pushing Bund futures to 120 euro.

Conversely, once achieved the aforementioned support futures price should settle and move sideways before getting back up again in the 120.5 – 120.7 euro zone.

The HyperVolatility team is going to place some shorts at the beginning of the week but the down movement should not be that drastic and if there will be the right opportunity (read stable volatility) we will try to place some long positions in order to profit from a short term rise of the price which should manifest itself towards the final part of the following week.

The week ahead is likely to be a choppy one, hence, an intra-day strategy could prove the most profitable to adopt.

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