Arrange the following in the correct order to show how speculation can affect the rupee-pound exchange rate:
(A) The rupee-pound exchange rate rises in the present.
(B) Investors believe that the pound will appreciate by the end of the month.
(C) The beliefs of the investors turn out to be self-fulfilling.
(D) The demand for pounds increases now.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (B), (D), (A), (C)
Speculation starts with a belief about the future and ends by making that belief come true.
(B) Investors believe that the pound will appreciate by the end of the month. — The chain starts with an expectation of gain.
(D) The demand for pounds increases now. — To make that gain, investors buy pounds today.
(A) The rupee-pound exchange rate rises in the present. — Higher demand pushes up the price of the pound now.
(C) The beliefs of the investors turn out to be self-fulfilling. — The pound has risen, just as they expected.
NCERT (2026-27): “Speculation … Thus exchange rates also get affected when people hold foreign exchange on the expectation that they can make gains from the appreciation of the currency. This expectation in turn can actually affect the exchange rate in the following way. If the current exchange rate is Rs. 80 to a pound and investors believe that the pound is going to appreciate by the end of the month and will be worth Rs.85, investors think if they gave the dealer Rs. 80,000 and bought 1000 pounds, at the end of the month, they would be able to exchange the pounds for Rs. 85,000, thus making a profit of Rs. 5,000. This expectation would increase the demand for pounds and cause the rupee-pound exchange rate to increase in the present, making the beliefs self-fulfilling.” |