Interactive Trilateral Foreign Exchange Exposure : Insights from Scenario Analysis

In interactive trilateral foreign exchange (FX) exposure, a company's exposures to two foreign currencies depend on the two currencies' FX rate with each other. This study uses scenario analysis to get a better understanding of interactive FX exposure and potential financial hedging solutions. A pro forma simulation analysis of FX rate innovations generates observations for multivariate regression estimates of the FX exposures to two foreign currencies. The scenarios show how these estimates guide a helpful financial hedging strategy