ABSTRACT
Speculation is an assumption of calculated risk by an individual investor or a firm with a view to making profits from future markets condition(s) the investor expects to happen. Sometimes the investor takes a speculative market position without an underlying cover, which is a naked speculation. If the expectations on the future unknown(s) materialize, the investor makes the pre-calculated amount(s) of profit. Since expectations may prove incorrect, an investor sometimes or often tries to insure himself against financial fatality by way of holding some fall-back positions. If the investor does speculate with such underlying protection, it becomes a covered speculation. In this chapter an attempt is made to demonstrate how spec-ulation yields profits to an investor in the foreign exchange markets – first without and then with protective measures. In the following section we present the analytical structure of naked speculation without, and then with, transaction costs. In the next section we give an exposition of covered speculation with currency options and synthetic combinations thereof. In the final section we make some concluding remarks.
