Crossing the line

Q: How a derivatives transaction be speculative in nature?

A: In any transaction involving two counterparties, if one party is reducing its risk then the other side is assuming it. For example, in case of options, the side buying the option by paying "option premium" is reducing its risk. While side receiving "option premium" is assuming the risk, i.e "writing option". Now writing an option is no doubt an speculative activity. 

Q: Is there any other speculative activity which resulted in huge losses for these banks?

A: Yes. Currency swaps i.e. swapping one currency exposure with a low interest currency was another major loss making derivatives transaction. Other activity was taking on "Leverage" i.e. making investments based on borrowed capital.

Q: But what forced or encouraged these banks to participate in speculation?

A: Traditionally banks relied on passive depositors - mainly working, middle class people, who keep their savings accounts, as a source of funds- for their financing requirements. But now these same passive depositors are becoming active investors in the stock market. In essence, banks are now dependent on "volatile" investors that the securities markets depends upon.