Hedging: In foreign exchange, a hedge is a type of transaction that is used to reduce the risk of currency fluctuations. This is typically done by buying or selling currency in the forward market at a set exchange rate. This allows companies or individuals to lock in a specific exchange rate for a future transaction, reducing their exposure to currency risk.
Arbitrage: Arbitrage in foreign exchange refers to the practice of taking advantage of price discrepancies between different markets. This can be done by buying currency in one market and selling it in another market where the exchange rate is more favorable. This can be a profitable way to make money in the currency market, but it also carries some risk.
Speculation: Speculation in foreign exchange refers to the practice of buying or selling currency based on predictions about future exchange rate movements. This can be done by individuals or institutions who are looking to make a profit from changes in the value of a currency. Speculators may use a variety of different strategies, such as technical analysis or fundamental analysis, to make their predictions. However, speculation also carries a higher level of risk as the outcome of the speculation is uncertain.