Friday, September 4, 2009

functions of the forward exchange market :Speculation on Future Currency Prices

A third use of the forward-exchange market is speculative investment based on expectations concerning future movements in currency prices. Speculators will buy currency for future delivery if they believe the future spot rate will be higher on the delivery date than the current forward rate. They will sell currency under a forward contact if the future spot rate appears likely to be below the forward rate on the day of delivery. Such speculative purchases and sales carry the advantage of requiring little or no capital and no borrowing costs in advance of the delivery date. A speculator whose forecast of future spot rates turns out to be correct makes a profit on the spread between the purchase and the sale price.

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