In international finance, speculation involves:
A) not being able to make a commitment to buy or sell.
B) taking a risk by purchasing (or selling) a foreign currency asset, holding it in anticipation of a rate increase (decrease).
C) simultaneously buying several currencies to ensure that at least one will rise in value.
D) avoiding risk of loss by offsetting an obligation to buy a foreign currency by locking in a contract to sell it at the same time.

Question

Quizplus · Accepted Answer

Speculation in international finance involves taking a risk by purchasing (or selling) a foreign currency asset, holding it in anticipation of a rate increase (decrease). This is done with the hope of earning a profit from the fluctuations in currency exchange rates. Option A is incorrect as speculation does involve making commitments to buy or sell in order to earn profit. Option C is incorrect as simultaneously buying several currencies is called diversification, which is a risk management strategy rather than speculation. Option D is incorrect as this is an example of hedging, which involves offsetting the risk of loss.

In International Finance, Speculation Involves