Spot market

A Spot Contract is the most common type of foreign currency contract. It is the real time currency price at any given time. The price is fixed although it takes two days for settlement. On receipt of cleared funds (usually BACS or CHAPS) the currency is then ready for immediate delivery (usually by Electronic Fund Transfer).

Spot contract along with forward contract are the most basic tools of foreign exchange risk management. These are contracts between end users and financial institutions which specify the terms of an exchange of two currencies. In any foreign exchange contract there are a number of variables which need to be agreed upon, including:

• Which currency is being bought and which currency is being sold
• The amounts of currency to be bought/sold
• The date on which the foreign exchange contract will mature (expire)
• The rate at which the exchange of currencies will occur.

With a foreign exchange spot contract, the transaction will proceed on the basis of the agreed exchange rate, and the payments occurring within two business days after that day.

This means that in a spot transaction, the currency which is bought will be receivable within two days, or the currency which is sold will be payable within two days. This will apply to all major currencies.

A Spot Exchange Contract is a bilateral contract between two counterparties, and therefore each party is responsible for assessing the credit standing and capacity of the other party, before entering into a transaction.

There are some differencies between spot and forward. All forex deals are agreements to buy or sell a currency at a specific rate against another currency (price) and apply to a specific date. That date can be off in the distant future, in which case the transaction is known as a forward deal. Typically, forward transactions are not more than a year ahead. Deals beyond five years are very rare.

Spot transactions are more immediate. A spot deal is an agreement to buy/sell a currency at the current exchange rate and will typically be completed within the following two business days. You will often hear references to the bid - the price a dealer is willing to pay for a currency - and the ask price, the price at which a currency is being offered for sale. The bid-ask spread, is the amount by which the ask price exceeds the bid price. A wide spread indicates illiquid trading conditions.