What is the difference between Hedging and Speculating?

What is hedging?

Hedging means avoiding or covering foreign exchange risk. The need of hedging arises because exchange rate fluctuates continuously. Accordingly, individuals, companies, and banks who expect to make or receive payments in foreign currencies at a future date face the risk of going to pay more or receiving less in domestic currency than they anticipated.

Such participants cover these risks in the forward market, as it does not involve tying up their funds.

Speculation, on the other hand, refers to taking a foreign exchange risk or an uncovered position in the deliberate hope of making a profit. It is opposite of hedging.