finance Finance refers to monetary resources and to the study and Academic discipline, discipline of money, currency, assets and Liability (financial accounting), liabilities. As a subject of study, is a field of Business administration, Business Admin ...

, a spot contract, spot transaction, or simply spot, is a contract of buying or selling a

commodity In economics, a commodity is an economic goods, good, usually a resource, that specifically has full or substantial fungibility: that is, the Market (economics), market treats instances of the good as equivalent or nearly so with no regard to w ...

security Security is protection from, or resilience against, potential harm (or other unwanted coercion). Beneficiaries (technically referents) of security may be persons and social groups, objects and institutions, ecosystems, or any other entity or ...

currency A currency is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general definition is that a currency is a ''system of money'' in common use within a specific envi ...

for immediate settlement (payment and delivery) on the spot date, which is normally two business days after the trade date. The settlement price (or rate) is called spot price (or spot rate). A spot contract is in contrast with a

forward contract In finance, a forward contract, or simply a forward, is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed on in the contract, making it a type of derivative instrument.John C Hu ...

futures contract In finance, a futures contract (sometimes called futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The item tr ...

where contract terms are agreed now but delivery and payment will occur at a future date.

Spot prices and future price expectations

Depending on the item being traded, spot prices can indicate market expectations of future price movements in different ways. For a security or non-perishable

(e.g. silver), the spot price reflects market expectations of future price movements. In theory, the difference in spot and forward prices should be equal to the finance charges, plus any earnings due to the holder of the security, according to the

cost of carry The cost of carry or carrying charge is the cost of holding a security or a physical commodity over a period of time. The carrying charge includes insurance, storage and interest on the invested funds as well as other incidental costs. In interes ...

model. For example, on a share the difference in price between the spot and forward is usually accounted for almost entirely by any

dividend A dividend is a distribution of profits by a corporation to its shareholders, after which the stock exchange decreases the price of the stock by the dividend to remove volatility. The market has no control over the stock price on open on the ex ...

s payable in the period minus the interest payable on the purchase price. Any other cost price would yield an

arbitrage Arbitrage (, ) is the practice of taking advantage of a difference in prices in two or more marketsstriking a combination of matching deals to capitalize on the difference, the profit being the difference between the market prices at which th ...

opportunity and riskless profit (see

rational pricing Rational pricing is the assumption in financial economics that asset prices – and hence asset pricing models – will reflect the arbitrage-free price of the asset as any deviation from this price will be "arbitraged away". This assu ...

for the arbitrage mechanics). In contrast, a perishable or soft commodity does not allow this arbitrage – the cost of storage is effectively higher than the expected future price of the commodity. As a result, spot prices will reflect current supply and demand, not future price movements. Spot prices can therefore be quite volatile and move independently from forward prices. According to the unbiased forward hypothesis, the difference between these prices will equal the expected price change of the commodity over the period.

Spot date

In finance, the spot date of a transaction is the normal settlement day when the transaction is done today. This kind of transaction is referred to as a spot transaction or simply spot. The spot date may be different for different types of financial transactions. In the

foreign exchange market The foreign exchange market (forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. By trading volume, ...

, spot is normally two banking days forward for the currency pair traded. A transaction which has settlement after the spot date is called a forward or a forward contract. image: OptionsTimeline.GIF Other settlement dates are also possible. Standard settlement dates are calculated from the spot date. For example, a one-month foreign exchange forward settles one month after the spot date. I.e., if today is 1 February, the spot date is 3 February and the one-month date is 3 March (assuming these dates are all business days). For a trade with two dates, such as a foreign exchange swap, the first date is usually taken as the spot date.

Examples

Bonds and swaps

A spot rate is the

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...

for a specific maturity, which is to be used for discounting the cash flows which occur at that date. An alternate statement of this: the rate of effective annual growth that equates the

present value In economics and finance, present value (PV), also known as present discounted value (PDV), is the value of an expected income stream determined as of the date of valuation. The present value is usually less than the future value because money ha ...

with the

future value Future value is the value of an asset at a specific date. It measures the nominal future sum of money that a given sum of money is "worth" at a specified time in the future assuming a certain interest rate, or more generally, rate of return; i ...

. The terminology is consistent with the above, in that the spot rate is related to the

forward rate The forward rate is the future yield on a bond. It is calculated using the yield curve. For example, the yield on a three-month Treasury bill six months from now is a ''forward rate''.. Forward rate calculation To extract the forward rate, we ...

analogously. A spot rate ''curve'' displays these rates over various maturities. Each security class will have its own curve (with the resultant credit spread – e.g. swaps vs government bonds – a function of increased

credit risk Credit risk is the chance that a borrower does not repay a loan In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay ...

). A ''zero rate'' curve or zero curve is the term structure of the yields-to-maturity of

Zero-coupon bond A zero-coupon bond (also discount bond or deep discount bond) is a bond in which the face value is repaid at the time of maturity. Unlike regular bonds, it does not make periodic interest payments or have so-called coupons, hence the term zer ...

s and maturities. Note that a spot rate curve is ''not'' a curve of bond ytm or

swap rate Swap or SWAP may refer to: Finance * Swap (finance), a derivative in which two parties agree to exchange one stream of cash flows against another * Barter Science and technology * Swap (computer programming), exchanging two variables in ...

sDavid Harper (2015)
spot-rates
''bionicturtle.com'' – which in fact are curves of currently trading ''prices'' of securities with various maturities (these would be:

yield curve In finance, the yield curve is a graph which depicts how the Yield to maturity, yields on debt instruments – such as bonds – vary as a function of their years remaining to Maturity (finance), maturity. Typically, the graph's horizontal ...

, swap curve, cash curve or coupon curve). Spot rates cannot be directly observed, prices can: spot rates are thus estimated from these prices via the bootstrapping method, and the result is the spot rate curve for the securities in question.

Currency

Commodity

A simple example: even if you know tomatoes are cheap in July and will be expensive in January, you cannot buy them in July and take delivery in January, since they will spoil before you can take advantage of January's high prices. The July price will reflect tomato supply and demand in July. The forward price for January will reflect the market's expectations of supply and demand in January. July tomatoes are effectively a different commodity from January tomatoes (contrast

contango Contango is a situation in which the futures contract, futures price (or forward contract, forward price) of a commodity is higher than the spot price. In a contango situation, arbitrageurs or speculators are "willing to pay more for a commodity ...

and

backwardation Normal backwardation, also sometimes called backwardation, is the market condition where the price of a commodity's forward contract, forward or futures contract is trading below the ''expected'' spot price at contract maturity. The resulting fu ...

References

{{Authority control Financial markets Securities (finance) Settlement (finance)