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Interactive trilateral foreign exchange exposure: insights from scenario analysis

Thomas O’Brien

Managerial Finance, 2019, vol. 45, issue 7, 856-868

Abstract: Purpose - 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. Design/methodology/approach - 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. Findings - 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. Research limitations/implications - 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. Practical implications - The scenarios relate to many common real-world situations and thus may help managers and educators better understand how to manage FX exposure. Originality/value - The topic of interactive FX exposure is under-researched and under-covered in contemporary textbooks or the applied finance literature.

Keywords: Interactive; Exchange rates; Financial hedging; FX exposure; Multivariate regression; M41; M44; F2; G15 (search for similar items in EconPapers)
Date: 2019
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