The purpose of this paper is to present scenarios of interactive trilateral foreign exchange (FX) exposure, where a company’s exposures to two foreign currencies depend on those currencies’ FX rate with each other.
A pro forma analysis of three-way FX rate changes illustrates interactive trilateral FX exposure and generates observations for a multivariate regression estimation of FX exposure coefficients.
The multivariate regression estimates of FX exposure provide the basis for a useful financial hedging strategy for interactive trilateral FX exposure. Some of the FX exposure estimates have surprising signs and magnitudes.
Scenario analysis does not result in a general theory of interactive FX exposure, but the study’s diverse and rich scenarios may provide helpful insights to theoretical and empirical researchers.
The scenarios relate to many common real-world situations and thus may help managers and educators better understand how to manage FX exposure.
The topic of interactive FX exposure is under-researched and under-covered in contemporary textbooks or the applied finance literature.
