The spot exchange rate is the price of an asset such as a commodity, interest rate, or currency exchange rate in a transaction that involves immediate delivery and immediate payment. Transactions that are settled immediately are said to occur in the spot market because they happen “right away.”
Definition and Examples of Spot Exchange Rates
The spot exchange rate is the price at which you can exchange an asset immediately. Like all prices, the spot exchange rate is determined by the supply and demand for that particular asset. An alternative name for it is: the spot price. An example of a spot exchange rate is what you pay to buy a commodity today instead of in the future through a futures price.
How Spot Exchange Rates Work
Since spot exchange rates are the price you pay for something at a specific point in time, the way they work is simple. A commodity, security, or currency has a specific price that you will pay to settle the transaction immediately. This price can change from day to day, depending on what you are buying or selling. The spot exchange rate is typically influenced by the number of people buying and selling the asset in question.
Types of Spot Exchange Rates
Spot exchange rates appear across a variety of assets and interest rates, including commodities, bond interest rates, exchange rates, and securities.
Commodities
A commodity is a product or resource whose individual units are indistinguishable from one another. Examples of commodities include gold, silver, and other metals, natural resources such as oil, and agricultural products including corn and wheat. Commodities are traded in both spot and futures markets. As with other spot prices, the spot exchange rate is the price for the commodity today.
Bond Interest Rates
The interest rate on a bond is the price that the issuer must pay to use the funds obtained from selling those bonds. The spot interest rate is the yield on a bond without interest for a specified maturity date.
Exchange Rates
The spot exchange rate is the amount of one currency that must be obtained to obtain a certain amount of another currency right now. Currencies are typically settled in the spot market within two days.
Securities
The current market price for a security is the spot price for that security. Financial securities can also be traded based on future contracts that set prices and settlements for future dates.
Spot Exchange Rate vs. Future Exchange Rate
The spot exchange rate is the price for an asset that is exchanged immediately. However, the future exchange rate is the agreed-upon price to exchange the asset at a later time. Future exchange rates depend on a futures contract and are established by the parties involved. All details of the futures contract, including price, settlement date, and the amount of the asset to be exchanged, are determined when the contract is created. However, no money or assets are exchanged until the specified settlement date arrives. Standardized futures contracts that are traded on exchanges are called futures.
What Does It Mean for Individual Investors?
If an investor wants to trade an asset immediately, the appropriate price is the spot exchange rate. Spot exchange rates change over time, and in the context of currency exchange, can affect the economy of a country. Spot exchange rates are not the only prices available for buying and selling a commodity or currency; they can also be traded through a futures contract or futures contracts for settlement later.
Source: https://www.thebalancemoney.com/what-is-a-spot-rate-5205092
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