THE FINANCL-U Rmm VOL. zyxw 32 No. 3 AUGUST zyx 1997 PP. zy 527-544 zy Forward Hedging the Exchange Risks of U.S. Equity Investments in the U.K., Germany and France Oscar Varela" and Atsuyuki Naka* Abstract This zyxwvut paper simulates forward hedging of foreign ex- change risks for U.S. investments in U.K., German and French equities. Rolling OLS and SUR regressions zy are used to obtain monthly exposure coefficients (hedge ra- tios), 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. Introduction This paper compares the unhedged U.S. dollar- based returns to those from forward hedging the ex- change rate zyxw risks of U.S. investments in the equity markets of the U.K., Germany and France. Unlike con- ventional hedging literature in investments and specula- tive markets, this paper's interest is in hedging the exchange risk of foreign investments rather than the market risk. However, since future values of equity mar- *University of New Orleans,New Orleans, LA 70148 We are grateful to two anonymous referees for many substantive com- ments that improved the quality of the paper. Any remaining errors are of coume the responsibility of the authors. We also wish to thank the Depart- ment of Accountancy and Finance at the University of Stirling, Scotland, for support in the acquisition of data. 527