Speculation

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1.

Any risk taking activity or decision which depends for its favourable result on market rates or prices.

For example, a decision to leave a natural operational exposure unhedged, or a decision not to buy a relevant insurance contract.


2.

Intentionally creating market positions - for example by buying or selling assets or derivative contracts - in the hope of making profits from favourable changes in market rates or prices.


3.

Similar position-taking activity which depends for its favourable result on there being no material change in prevailing market rates, prices or conditions.

For example, selling straddle options (being one of the speculative activities undertaken by the Barings Bank ‘rogue trader’ Nick Leeson).

Another example would be a decision to operate without committed credit lines, or a decision to ride the yield curve.


See also