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Forward Hedging the Exchange Risks of U.S. Equity Investments in the U.K., Germany and France
Author(s) -
Varela Oscar,
Naka Atsuyuki
Publication year - 1997
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1997.tb00437.x
Subject(s) - hedge , equity (law) , liberian dollar , economics , financial economics , foreign exchange , econometrics , market neutral , futures contract , forward contract , monetary economics , portfolio , finance , ecology , political science , law , biology
Abstract This paper simulates forward hedging of foreign exchange risks for U.S. investments in U.K., German and French equities. Rolling OLS and SUR regressions are used to obtain monthly exposure coefficients (hedge ratios), and the micro‐market mechanics of the exchange rate bid‐ask spread are considered throughout. While the coefficient of variation favors not hedging, no statistically significant differences are found between no hedge and hedge strategies. However, hedging produces a nontrivial incidence of cases where liquidated foreign equity values are less than amounts sold forward. The results, robust to rising and falling dollar sub‐periods, do not support forward hedging.