Why does demand for foreign exchange arise for speculative activities?

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Solution

Demand for foreign exchange arises when people want to speculate on the value of foreign currency. Speculators demand foreign currency in the present period with the aim of selling it in future at higher prices. For example, Manish purchases $1, 000 U S$ $a t$ Rs. 50$ per dollar with the expectation of selling the dollars at higher prices.

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