Speculation is the practice of engaging in risky financial transactions in an attempt to profit from

fluctuations in the market value of a tradable good such as a financial instrument, rather than
attempting to profit from the underlying financial attributes embodied in the instrument such as capital
gains, interest, or dividends. Many speculators pay little attention to the fundamental value of a security
and instead focus purely on price movements. Speculation can in principle involve any tradable good or
financial instrument. Speculators are particularly common in the markets for stocks, bonds, commodity
futures, currencies, fine art, collectibles, real estate, and derivatives.
Speculators play one of four primary roles in financial markets, along with hedgers who engage in
transactions to offset some other pre existing risk, arbitrageurs who seek to profit from situations where
fungible instruments trade at different prices in different market segments, and investors who seek
profit through long-term ownership of an instrument's underlying attributes.


Speculation IN FOREIGN EXCHANGE MARKET:
Speculation IN FOREIGN EXCHANGE MARKET BY KUMARI POOJA 18-2009

Slide 2:
SPECULATION IS THE OPPOSITE OF HEDGING SPECULATORS ACCEPTS EXCHANGE RATE RISK IN THE HOPE
OF MAKING PROFIT INTRODUTION THEY BELIEVE THAT THE FUTURE SPOT RATES WILL BE DIFFERENT
FROM QUOTED FORWARD RATE CAN TAKE PLACE IN THE SPOT, FORWARD, FUTURES AND OPTIONS
MARKETS

Slide 3:
Speculators who buy or sell currencies when they expect movement in the exchange rate in a particular
direction . They make their profit from movement of exchange rate in the desired direction . MEANING

Slide 4:
SPECULATION CAN BE STABILIZING AND DESTABILIZING STABILIZING Purchase of foreign currency when
the exchange rate falls in the expectation that will soon rise , thus leading to profit. Sale o f foreign
currency when exchange rate rises in the expectation that it will soon fall. Stabilizing speculation
moderates the fluctuations in exchange rate and performs a useful function.

Slide 5:
SPECULATION CAN BE STABILIZING OR DESTABILIZING DESTABILIZING Sale of foreign currency when
exchange rate is low in the expectation that it will fall even further . Purchase of foreign currency when
exchange rate rising in the expectation that it will rise even higher in future

Slide 6:
LETS SEE SPECULATION IN DIFFERENT MARKETS

Slide 7:
SPECULATION IN SPOT MARKET SPOT MARKET TRANSACTIONS REQUIRE IMMEDIATE DELIVERY OF THE
TRADED CURRENCY MEANING

Slide 8:
SPECULATION IN SPOT MARKET SPECULATION IN THE SPOT MARKET OCCURS WHEN THE SPECULATOR
ANTICIPATES A CHANGE IN THE VALUE OF A CURRENCY

Slide 9:
Suppose the exchange rate today is Rs. 40 /US $ . The speculator anticipates this rate to become Rs.
41/US within the coming three months . Under these circumstances , he will buy US $1,000 for Rs 40000
and hold this amount for three months , although he is not committed to this particular time horizon .
when the target exchange rate is reached , he will sell US $1000 at the new exchange rate , that is at Rs
41 per dollar and earn a profit of Rs. 41000- 40000 =Rs. 1000 SPECULATION IN SPOT MARKET EXAMPLE

Slide 10:
SPECULATION IN FORWARD MARKET VALUE DATE / SETTLEMENT DATE IS THE DAY ON WHICH THE
TRADED CURRENCY IS DELIVERED MEANING

Slide 11:
SPECULATION IN FORWARD MARKET Their purpose is not to reduce the risk but to reap profits from the
changes in the forward rate and the future spot rate, they are not very concerned with the direction of
the exchange rate change. In addition to the arbitrageur or the hedger, speculators are also very in
forward market operation. THEIR PURPOSE IS NOT TO REDUCE THE RISK BUT TO REAP PROFITS FROM
THE CHANGES IN THE EXCHANGE RATES.THE SOURCE OF PROFIT TO THEM BEING THE DIFFERENCE
BETWEEN THE FORWARD RATE AND THE FUTURE SPOT RATE, THEY ARE NOT VERY CONCERNED WITH
THE DIRECTION OF THE EXCHANGE RATE CHANGE. IN ADDITION TO THE ARBITRAGEUR OR THE HEDGER,
SPECULATORS ARE ALSO VERY ACTIVE IN FORWARD MARKET OPERATION .

Slide 12:
SPECULATION IN FORWARD MARKET Forward market speculation cannot be extended beyond the
maturity date of the forward contract. However, if the speculator wants to close out the speculation
operation prior to the maturity , he may buy an offsetting contract

Slide 13:
EXAMPLE SPECULATION IN FORWARD MARKET SUPPOSE A SPECULATOR SELLS US $ 1,000 THREE -
MONTH FORWARD AT THE RATE OF Rs40.50/ US $. IF , ON MATURITY , THE US DOLLAR DEPRECIATES TO
Rs. 40 , THE SPECULATOR WILL GET RS. 40,500 UNDER THE FORWARD CONTRACT . AT THE SAME TIME ,
HE WILL EXCHANGE RS. 40,500 AT THE THEN FUTURE SPOT RATE OF RS. 40/US $ AND WILL GET US $
1,012.50. BOTH THESE ACTIVITIES THE SELLING AND THE PURCHASING OF US DOLLARS WILL BE
SIMULTANEOUS. THUS WITHOUT MAKING ANY INVESTMENT , THE SPECULATOR WILL MAKE A PROFIT
OF US $ 12.50 THROUGH THE FORWARD MARKET DEAL .

Slide 14:
SPECULATION WITH CURRENCY FUTURES CURRENCY FUTURES MARKET IS AN ORGANISED MARKET, AND
NOT OVER- THE COUNTER, FOR THE SALE AND PURCHASE OF SPECIFIED AMOUNT OF CURRENCIES
MEANING

Slide 15:
SPECULATION WITH CURRENCY FUTURES IT MAY BE NOTED HERE THAT THESE TRENSACTION INVOLVE
COST THAT IS TO BE DEDUCTED FROM THE GAIN . THE TRENSACTION COST IS VERY NOMINAL FOR THE
LOCALS , BUT IS SIGNIFICANT FOR THE SPECULATORS. IF THE SPOT RATE OF A PARTICULAR CURRENCY IS
EXPECTED TO DEPRECIATE BELOW THE RATE MENTIONED IN THE CURRENCY FUTURES CONTRACT , THE
SPECULATORS WILL SELL CURRENCY FUTURES IN THAT CURRENCY . WHEN THEY EXPECT THAT THE SPOT
RATE OF A PARTICULAR CURRENCY WILL MOVE UP BEYOND THOSE MENTIONED IN THE CURRENCY
FUTURES CONTRACT , THEY BUY CURRENCY FUTURES DENOMINATED IN THAT PARTICULAR CURRENCY .
SPECULATORS MAKE USE OF THE CURRENCY FUTURES FOR REAPING PROFITS.

Slide 16:
INTRA CURRENCY SPREAD SPECULATORS CAN BUY OR SELL FUTURES OF THE SAME CURRENCY FOR
TWO DELIVERY DATES IF THE RATES FOR THOSE TWO DATES DIFFER . THIS IS KNOWN AS INTRA
CURRENCY SPREAD. SPECULATION WITH CURRENCY FUTURES

Slide 17:
SUPPOSE POUND IS EXPECTED TO APPRECIATE TILL JUNE AND THEN IT IS EXPECTED TO DEPRECIATE AT
LEAST BY SEPTEMBER AT A FASTER RATE THAN HE FUTURES RATE .IN THIS CASE , A SPECULATOR WILL
BUY A POUND FUTURES CONTRACT FOR JUNE DELIVERY AND SELL ANOTHER ONE FOR THE SEPTEMBER
DELIVERY . SUPPOSE POUND FUTURES ARE AVAILABLE AT $ 0.650 / F OR JUNE DELIVERY AND AT
$0.640/ FOR SEPTEMBER DELIVERY . THE SPOT RATE OF POUND RISES TO $ 0.655 IN THE JUNE
MATURITY BUT , CONTRARY TO THE SPECULATORS EXPECTATONS , FALL ONLY TO 0.642/ BY
SEPTEMBER MATURITY DATE. THE SPECULATOR WILL GAIN $ 0.005 PER POUND ON THE JUNE
DELIVERY CONTRACT BUT WILL LOSE $ 0.002 ON THE SEPTEMBER CONTRACT . THE NET GAIN WILL BE
EQUAL TO $ (0.005- 0.002) *62,500 = $187.5 SPECULATION WITH CURRENCY FUTURES NOTE: IT
IGNORES MARKING TO MARKET EXAMPLE

Slide 18:
INTER-CURRENCY SPREAD BESIDES THE INTRA- CURRENCY A SPREAD, INTER-CURRENCY SPREAD IS ALSO
USED BY THE SPECULATORS . SUCH SPREAD OCCURS WHEN THE DEAL INVOLVES PURCHASE AND SALE
OF FUTURE CONTRACTS WITH THE SAME DELIVERY DATE BUT WITH TWO DIFFERENT UNDERLYING
CURRENCIES. SPECULATION WITH CURRENCY FUTURES

Slide 19:
SPECULATION WITH CURRENCY FUTURES IF POUND FUTRES CONTRACT IS AVAILABLE AT $ 1.690 AND
EURO FUTURES CONTRACT IS AVAILABLE AT $ 1.250 . POUND IS EXPECTED TO APPRECIATE AND EURO IS
EXPECTED TO DEPRECIATE . IN SUCH A SITUATION, A SPECULATOR WILL BUY A POUND FUTURES
CONTRACT AND SELL EURO FUTURES CONTRACT FOR THE SAME MATURITY . IF , CONTRARY TO THE
EXPECTATION , POUND DEPRECIATION TO $ 1.680 AND EURO DEPRECIATES TO $ 1.235 , FIND OUT THE
GAIN TO THE SPECULATOR FROM THE INTER- CURRENCY SPREAD. SOLUTION : LOSS ON POUND
FUTURES CONTRACT =$1.690- 1.680= $0.010 PER POND OR TOTAL LOSS =$0.010 *62500= $625 GAIN
ON THE EURO FUTURES CONTRACT = 1.250-1.235=$0.015 per pound or total gain = $0.015*125000=$
1875. Net gain =$1875-625=$1250 . NOTE: IT IGNORES MARKING TO MARKET EXAMPLE

Slide 20:
SPECULATING WITH OPTIONS MEANING CURRENCY OPTION CONTRACT CONFERS ON OPTIONS- BUYER
PRIVILEGE OF NOT EXERCISING THE CONTRAT WHEN EXCHANGE RATE IS NOT IN HIS FAOUR

Slide 21:
SPECULATING WITH OPTIONS Speculators make profit out of purchase of currency options . They
normally buy call option when they expect upward movement in the value of the underlying currency .
On the expiry date , they buy the currency at the agreed upon rate and sell it in the open market at a
higher rate and thereby reap profits . On t he contrary , they buy put option when they expect
depreciation of the underlying currency. They sell the underlying currency at an agreed upon rate hat
is higher than the spot rate . This way they get more of the other currency than they could get in the
open market. Besides these simple operations, they often go in for complicated deals mixing either two
calls or two puts or one call and the other put .

Slide 22:
SPECULATING WITH OPTIONS EXAMPLE POUND IS EXPECTED TO APPRECIATE TO $1.930. POUND
OPTION ARE AVAILABLE AT A STRIKE PRICE OF $ 1.830/ WITH A PREMIUM OF $0.03/ . HOW DO
SPECULATORES REACT TO THE APPRECIATION OF POUND ? SOLUTION: SPECULATOR WILL BUY A CALL.
ON THE MATURITY , HE WILL GET 62500 AT $1.830/ . IMMEDIATELY AFTER GETTING POUND , HE
WILL SELL THOSE POUND IN THE OPEN MARKET TO GET DOLLAR BACK AND THIS WAY , HE WILL GAIN $
(1.930-1.830-0.03) * 62500 =$4375.

Slide 23:
SPECULATING WITH OPTIONS EXAMPLE POUND IS EXPECTED TO DEPRECIATE TO $1.730. POUND AT A
STRIKE PRICE OF $ 1.830/ WITH A PREMIUM OF $0.03/ . HOW DO SPECULATORES REACT TO THE
DEPRECIATION OF POUND ? SOLUTION: SPECULATOR WILL BUY A PUT. ON THE MATURITY , HE WILL GET
$1,14,375 THROUGH SELLING 62,500 AT $1.830/ . IMMEDIATELY AFTER GETTING DOLLAR , HE WILL
SELL THOSE DOLLARS IN THE OPEN MARKET AT $ 1.730/ TO GET POUND BACK AND THIS WAY , HE WILL
GAIN $ (1.830-1.730-0.03) * 62500 =$4,375 .

Slide 24:
REFERENCES: BOOK 1. INTERNATIONAL FINANCIAL MANAGEMENT BY VYUPTAKESH SHARAN 2.
INTERNATIONAL FINANCE BY KEITH PILBEAM WEBSITE WWW.GOOGLE .COM
The Roles of Speculators and Central Banks in Foreign Exchange Markets

By Ayse Evrensel from International Finance For Dummies


Speculators and central banks are important participants in foreign exchange markets. Speculators
invest in assets denominated in different currencies and, therefore, buy or sell currencies. Central banks
may be engaged in foreign exchange markets to increase or decrease the value of their currency with
respect to other currencies.

Speculators in foreign exchange markets

The generic term speculator includes a wide variety of market participants. Foreign exchange traders
and brokers make up a relatively small segment among speculators; commercial banks, hedge funds,
and other financial companies represent the most important group among speculators.

Regardless of type, speculators in foreign exchange markets want to profit from buying currency low
and selling it high. In other words, all speculators try to make a profit from fluctuations in exchange
rates.

The interbank market, which consists of large commercial banks and financial firms, is a major player in
foreign exchange markets. Its activity helps determine the bid (buy) and ask (sell) price of currencies.
This market has no trading floor, but banks can trade with each other directly or via electronic brokerage
systems that connect market participants.

Multinational companies also engage in speculation because they make or receive payments
denominated in various currencies to and from firms around the world. These currencies fluctuate on a
daily basis. Therefore, multinational companies are also involved in speculation to hedge against their
exchange rate risk.

Central banks in foreign exchange markets

Central banks have a unique place in foreign exchange markets. First, unlike the other groups involved in
foreign exchange markets, the central banks involvement in foreign exchange markets doesnt have a
profit motive.

Second, central banks decisions regarding monetary policy are extremely influential on exchange rate
determination. Central banks indirectly affect exchange rates through their monetary policy decisions. In
every country, central banks are responsible for conducting monetary policy, among their other roles.
The main goals of monetary policy are to promote price stability and economic growth.

Basically, a central bank addresses the domestic economys problems by changing the quantity of
money and interest rates, which leads to changes in the exchange rate as well.

Third, central banks can directly affect exchange rates through interventions into foreign exchange
markets. A central bank can use its domestic currency and foreign currency reserves to buy or sell
foreign currencies directly in the foreign exchange market.

Alternatively, central banks may be involved in foreign exchange markets for reasons that arent related
to their own countries but are related to the common concerns at the international level. For example,
several central banks may come together in a joint action in foreign exchange markets to provide
liquidity and credit across the world.
International Finance For Dummies Ayse Evrensel May 2013