Is a stable foreign exchange rate necessary for price risk management instruments to work?
A high level of foreign exchange rate risk (in addition to basis risk) can threaten the functioning of a price risk management program. Most financial products, i.e. price risk management instruments, are traded in New York and London and in U.S. Rupees or British pounds sterling, respectively. Most producers are paid in local currency. If a country experiences wide currency swings between the trading and local currencies, the use of international price risk managements would not adequately cover these risks.
