Dynamics of Speculation in Future Markets

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Speculation is a financial transaction that involves risk but is potentially profitable. Unlike ordinary investment, speculations have more risks the investor has to undertake..

Speculation deals with future market transaction wherein a speculator keeps an eye on the market situation, and when he sees market differences, he buys the commodity at a lower price, and sells it at a higher price, and makes profit for himself.

A commodity futures transaction is regarded in a particular way as speculation, wherein the investors enter into a contract to buy a fixed amount of commodity, which usually has a fluctuating price, at a fixed price in the future, [ex. 1 or 2 years]. The contract is sold in an open market, or thru a commodity exchange.

A speculator undertakes the risk and faces a higher possibility of loss thru fluctuation of exchange rates, reduction of expected income at the time of profit realization. There is also a possibility of non payment of contracting overseas party, aside from unexpected political issues, and economic fluctuation.

Scrutiny of market possibilities, risk and management is done by a broker who uses various hedging techniques as option trading, short selling, stop loss orders, and future contract transactions to limit losses of investors.

Hedging eliminates the risk in speculative transaction. This is like betting on a boxing bout, wherein you put a bet on both players, and whoever wins, you come out the same. In manufacturing, for example, the owner will hedge [buy] his supplies needed to finish a contract, when he hears rumors of price increase. He will enter into a futures commodity contract to lock out the price of his supplies. As a price and supply stability factor, hedging eliminates the risk in the manufacturing process.

Compared to bonds and stocks which are regarded to have positive contributions to the economic growth of the country, currency speculation is considered by some economists as gambling, and has an undesirable effect to economy. Large hedges are done by professional speculators with very big capital.

Former Malaysian Prime Minister Mahathir Mohammad, according to a report, had blamed speculators on the devaluation of the Malaysian ringgit in 1997 It was also noted that speculations caused the devaluation of the krona in Sweden in 1992.

In any case, speculators are seen as enforcers of trade agreements who assume greater risk than those who avoid it. It could not be called gambling which is a game of chance as speculation has techniques to measure risk to avoid losses.