The first model of a speculative attack was contained in a 1975 discussion paper on the gold market by Stephen Salant and Dale Henderson at the Federal Reserve Board.
Paul Krugman, who visited the Board as a graduate student intern, soon[1] adapted their mechanism[2] to explain speculative attacks in the foreign exchange market.
[3] There are now many hundreds of journal articles on financial speculative attacks, which are typically grouped into three categories: first, second, and third generation models.
If the nation X runs out of foreign reserve Y in this period or if they are forced to allow their currency to float, the value of X may drop to an exchange rate of 2X to 1Y.
An example of this can be seen in the United Kingdom prior to the implementation of the euro when European countries used a fixed exchange rate amongst the nations.
Investors were then able to convert their German marks back into sterling at a significantly higher rate, allowing them to pay off their loans and keep large profits.
[citation needed] A speculative attack has much in common with cornering the market, as it involves building up a large directional position in the hope of exiting at a better price.