Correspondence: Paul Dawson, College of Business Administration, Kent State University, Kent, OH 44242, USA. Tel: +1 330 672 1242; Fax: +1 330 672 9806; E-mail: pdawson1@kent.edu

¹Paul Dawson is an assistant professor of finance at Kent State University, Ohio. His research interests include practical applications of all types of derivatives. He also trains practitioners worldwide in the use of these instruments.

Received 20 November 2006; Revised 20 November 2006.

Abstract

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.