24 Risk of currency futures. Currency futures markets are commonly used as a means of capitalizing on shifts in currency values, because the value of a futures contract tends to move in line with the change in the corresponding currency value. Recently, many currencies appreciated against the dollar. Most speculators anticipated that the dollar’s value would continue to decline. However, the Fed intervened in the foreign exchange market by immediately buying dollars with foreign currency, causing an abrupt halt in the decline in the value of the dollar. Participants that had sold dollar futures contracts for a range of other currencies incurred large losses.

a Explain why the central bank’s intervention caused such panic among currency futures traders with sell positions.

b Some traders with sell positions on dollars may have responded immediately to the central bank’s intervention by buying futures contracts. Why would some speculators with buy positions leave their positions unchanged or even increase their positions by purchasing more futures contracts in response to the central bank’s intervention?