Question

Malaysia and Thailand took drastic measure to clamp down on trading in the Thai baht and the Malaysian ringgit as well as foreign direct investment in their nations.

Do you think an international policy restricting currency trading amongst arbitrageurs and speculators will prevent monetary problems in the future?

Do you think it is ethical for global speculators to bet against domestic currencies (American speculators betting against the dollar) possibly sending entire economies into a tailspin?

Or do you think currency speculators perform a valuable service by correcting overvalued and undervalued currencies?

Answer 1

Answer:-

This problem deals with currency devaluation by outside forces. In this example, a currency is being devalued by speculators and questions arise as to the morality and possibility of correcting a system. An international policy that restricted currency trading could curtail large speculative positions effectively, but this may also lead to unforeseen consequences as well as inefficient markets. Additional implications would lead to more speculation-volatility, in domestic markets as hedge funds and large leverage investors look for other ways to make up for the lost revenue from currency trading. At the end, the question poses a personal question of how ethical it is for these traders to profit while potentially ruining national economies. An argument can be made that large speculative positions should not be allowed as smaller economies are susceptible to manipulation. This manipulation damages the currency and all debt holders involved and increases foreign risk. We could argue furthermore, that most if not all futures contracts should be for hedging purposes only, as large money holders will always be able to take advantage of smaller ones. Conversely, we could argue that these speculators correct over priced goods and create opportunities for future investment once the price is corrected.