What are two positive roles that speculators play in currency markets?
What will be an ideal response?
Speculators buy foreign currency in hopes of reselling it later at a profit. They also sell foreign currency in hopes of re-buying it later when it is cheaper. One positive function of speculators is that they smooth out temporary fluctuations in the value of foreign currencies. If there is a temporary decline in the demand for a foreign currency, speculators take advantage of the lower value and buy the currency, thus increasing demand and supporting its value. If there is a temporary strong demand that raises the value of a currency higher than economic conditions suggest the price should be should be, then speculators can sell their holdings of foreign currency to take advantage of the high price, thus reducing its value.
Another positive role speculators play in currency markets is that they bear risks that others do not want. International transactions can be risky because exchange rates change minute by minute. Buyers and sellers can decrease this by hedging—an action a buyer or seller takes to protect against an unfavorable change in exchange rates in the future. In a futures market, a person can buy and sell items at a contract price that is fixed with the promise of delivery at a future date. It is speculators who will often assume the risk of delivering the specified amount of foreign exchange at the contract price on the date of delivery. If the currency they are buying depreciates before the contract date, then they will be able to make a profit because they can buy the currency at a cheaper price. If, however, the currency should appreciate in value by the time of the contract delivery date, they will have to purchase a higher-priced currency to fulfill the contract and thus lose money.
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Indicate whether the statement is true or false