Speculation in the foreignexchange market

Foreign-exchange markets facilitate both commercial and private transactions such as foreign trade, loans, and investments. In addition, they give rise to exchange speculation. The purpose of speculation in the foreign-exchange market is to make a profit from exchange rate fluctuations by deliberately taking an uncovered position. Speculation can be undertaken in both the spot market and the forward market.

Speculating in the spot market Suppose that a speculator anticipates that the spot rate of the Swiss franc will appreciate in 90 days. The speculator will purchase francs at today's spot rate, will hold them for 90 days, and will resell them at a higher rate.

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