1. Economics Class 12
  2. Macroeconomics
  3. Chapter 6 Part 1 - Foreign Exchange Rates
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How does Speculation affects Exchange Rates?

Last updated at Dec. 13, 2024 by Teachoo

People Speculate in Foreign Exchange to earn Profits

Example 1

Suppose Exchange Rate of Dollar is currently Rs 70 per Dollar

Person feel that it will rise in future to Rs 80 per Dollar

So they will Purchase Dollar today @ Rs 70 and sell it later at Rs 80

So there is Increase in Demand of Foreign Currency

 

Example 2

Suppose Exchange Rate of Dollar is currently Rs 70 per Dollar

Person feel that it will fall in future to Rs 60 per Dollar

So they will Sell Dollar today @ Rs 70 and purchase it later at Rs 60

Selling now decreases demand of foreign exchange

So there is decrease in demand of foreign currency

Transcript

Effect of Speculation on Exchange Rates Exchange Rate increase Expected Current Exchange Rate =Rs 70 per $ Speculator expects it to become Rs 80 per $ So, speculator Purchase dollar now & sell in future Sales 80 Purchase 70 Profit 10 Purchasing now increases demand for foreign currency Exchange Rate Decrease Expected Current Exchange Rate =Rs 70 per $ Speculator expects it to become Rs 60 per $ So, speculator Sell dollar now & buy in future Sales 70 Purchase 60 Profit 10 Selling now decreases demand for foreign currency
  1. Economics Class 12
  2. Macroeconomics

    3. Chapter 6 Part 1 - Foreign Exchange Rates

    Chapter 6 Part 2 - Balance of Payment →
Chapter 6 Part 2 - Balance of Payment →
Economics Class 12
Macroeconomics

About the Author

Maninder Singh

CA Maninder Singh is a Chartered Accountant for the past 14 years and a teacher from the past 18 years. He teaches Science, Economics, Accounting and English at Teachoo