Showing papers on "Single-stock futures published in 2007"
TL;DR: In this article, the authors proposed a new technique for hedging exposure to an individual stock that does not have options or exchange-traded single stock futures (SSF) contracts written on it.
Abstract: This study evaluates the efficiency of cross hedging with single stock futures (SSF) contracts. We propose a new technique for hedging exposure to an individual stock that does not have options or exchange-traded SSF contracts written on it. Our method selects as a hedging instrument a portfolio of SSF contracts which are selected based on how closely matched their underlying firm characteristics are with the characteristics of the individual stock we are attempting to hedge. We investigate whether using cross-sectional characteristics to construct our hedge can provide hedging efficiency gains over that of constructing the hedge based on return correlations alone. Overall, we find that the best hedging performance is achieved through a portfolio that is hedged with market index futures and a SSF matched by both historical return correlation and cross-sectional matching characteristics. We also find it preferable to retain the chosen SSF contracts for the whole out-of-sample period while re-estimating the optimal hedge ratio at each rolling window.
19 citations
TL;DR: In this paper, the authors present an effective static hedging technique for the foreign exchange risk in overscas equity investment using single stock futures, which is shown to provide a hedge free of the usual requirement for covariance forecasts.
Abstract: This paper presents an effective static hedging technique for the foreign exchange risk in overscas equity investment. The high correlation between single stock futures and the underlying stock, combined with the daily marking to market of the futures margin account and the ability to manage that account in a foreign currency, are shown to provide a hedge free of the usual requirement for covariance forecasts. Single stock futures, introduced in the United States in 2002, offer a benefit not previously discussed in the financial literature. They can serve as near-perfect hedging instruments for overseas investors who wish to assume the equity risk, but not the concomitant foreign exchange risk. Prior to the introduction of these instruments, such investors were obliged either to adopt less effective hedging strategies, such as a static hedge using foreign exchange forwards, or to trade illiquid OTC products, whose pricing is dependent on the accuracy of a covariance forecast. In this paper, this new application is presented in theory and tested in practice and found to be robust even in challenging market conditions.
4 citations