What is meant by speculation How can speculatipon take place

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

Solution

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.