Question

How does speculation risk compare between the fixed and flexible exchange rate systems?

Options

• Lower under the fixed system (but vulnerable to attacks); higher under the flexible system

• Higher under the fixed system; lower under the flexible system

• Absent under both systems

• Identical under both systems

Answer 1

Speculation risk is lower under the fixed exchange rate system, yet the system remains vulnerable to speculative attacks. The flexible exchange rate system carries a higher speculation risk because its fluctuating rate invites currency speculation.