Describe a situation in which a one-way speculative gamble would be possible and explain the effects that this type of speculation would have on a country trying to maintain its fixed exchange rate.

What will be an ideal response?

POSSIBLE RESPONSE: When a currency clearly is in danger of being devalued, the situation may give rise to a one-way speculative gamble. If speculators know that a currency could not significantly rise in value, the speculator can sell the currency in the spot or forward market. If the currency does not drop in value, there is not much to lose. If the currency is devalued, it can bring the investors large speculative profits. With little to lose and much to gain, speculators can gang up on a currency that is moving into a crisis phase. As speculators bet against the currency, the government must increase its intervention to defend the fixed exchange rate, selling foreign currency and buying its own currency. The government is running down its holdings of official reserve assets at a faster rate. If this continues, the government usually must surrender, and allow devaluation or depreciation of its currency.