Question

What is meant by speculation? How can speculatipon take place in the spot and forward markets?

What is meant by speculation? How can speculatipon take place in the spot and forward markets?

Homework Answers

Answer #1

Speculation: Speculation is the act of trading in an asset or conducting financial transaction that has a significant risk of losing most with the expectation of a substantial gain. With speculation , the risk of loss is more than offset by the possibility of a huge gain. Speculation in foreign exchange is an act of buying or selling the foreign currency under the conditions of uncertainty with a view to earning high gains.

Speculators buy currency when it is weak and sell when it is strong.

Speculation in forward and spot market :

If the spot rate of the currency is expected to increase in future , then speculator buys forward and sell on the spot the currency bought by him. If the speculator expected a fall in the exchange rate , then he sells forward at the current rate and buy the spot when the currency is needed for delivery.

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