Spot Price

The current market price of a security, currency, or product available for purchase/sale for immediate settlement is the spot price (or spot rate). In finance, a spot deal, spot sale, or simply spot, is a deal of buying or selling a product, security, or currency for immediate settlement (payment and delivery) on the spot date, which is usually two business days after the trade date. In other words, that is the price at which an asset is priced right now by the sellers and buyers.

This value is successively supported what proportion buyers are willing to pay and the way much sellers are willing to just accept, which usually depends on a mix of things including current market price and expected future value. Depending on the commodity being exchanged, spot prices may reflect consumer expectations of future price changes in different ways. It represents the supply and demand for an asset in the market. As a consequence, spot rates change regularly and can often fluctuate significantly, particularly if major events occur or important headline news occurs. While spot prices can vary by time and geographic regions, the prices are generally homogenous in financial markets. Price uniformity across different financial markets does not allow market participants in different markets to take advantage of arbitration benefits resulting from large price differences for the same commodity.

Example of Spot Price/Rate

In currency transactions, the term is influenced by the stress of people and businesses wishing to transact in a very foreign currency, furthermore as by forex traders. Most often, spot prices are considered within the context of forwards and futures contracts. The spot price/rate from a foreign exchange perspective is often called the “benchmark rate”, “straightforward rate” or “outright rate.” One of the reasons for the existence of such financial contracts is to “lock-in” the desired spot price of a commodity at some future date because rates continuously adjust due to fluctuations in supply and demand.

For a security or non-perishable commodity (e.g. silver), the terms reflect market expectations of future price movements. It’s a key variable in determining the worth of a derivative instrument. It can indicate expectations about fluctuations in future commodity prices. In addition to currencies, commodities (e.g., crude oil, synthetic gasoline, propane, cotton, gold, copper, coffee and wheat, lumber) and bonds are assets that have spot prices/rates. In principle, the difference in spot and forward prices should be equal to the finance costs, plus any earnings due to the holder of the safe, according to the cost of carry model.

Commodity spot rates are supported supply and demand for this stuff, while bond spot rates are supported by the zero-coupon rate. The most difference between spot and futures prices is that spot prices are for immediate buying and selling, while futures contracts delay payment and delivery to predetermined future dates. The spot rate is used to calculate the forward rate of the price of a future financial transaction since the estimated future value of a product, protection, or currency is based, in part, on its current value and, in part, on the risk-free rate and the period before the maturity of the contract.

Therefore, spot prices/rates can be very unpredictable and shift separately from forwarding prices. Traders will extrapolate an uncertain spot rate if they know the futures price, risk-free rate, and time to maturity. The difference between these prices would, according to the unbiased forward hypothesis, be equal to the anticipated price change of the commodity over the period.

 

Information Sources:

  1. investopedia.com
  2. corporatefinanceinstitute.com
  3. wikipedia