The spot rate, also known as the spot price, is the price given that acts as the immediate settlement on an asset such as interest rate, security, commodity, currency, etc. Hence, this is the current market value of an asset available for on-the-spot delivery when the quote was given. The present and the future market value create a massive impact on how much the buyers are ready to pay and how much the sellers are willing to accept. The disposition of the buyers and sellers tells us a lot about the spot price’s value.
Spot prices are known to be particular about time and place. However, spot prices of many securities and commodities also tend to be the same worldwide relative to the exchange rates. On the other hand, we also have futures and forward prices. The two parties already agreed on a price when the asset gets delivered in the future.
Spot rates and the forex market
In forex, you will encounter terms such as benchmark rate, straightforward rate, or outright rate. And when you do, know that all of these are synonymous to spot rate. Many factors can impact the spot rate, including the demands of entities who want to make transactions using foreign currency.
Spot rates and other assets
Other examples of assets with spot rates include bonds and commodities. Commodities are bases or raw materials needed in making final goods and products. For instance, we have crude oil, gasoline, cotton, coffee, wheat, lumber, metals like gold, silver, steel, copper, and more. The spot rates of commodities depend on their supply and demand.
On the other hand, spot rates for bonds depend on zero-coupon rates. If you want to access spot rates, it’s pretty easy. News and popular sources like Bloomberg, Reuters, Morningstar, and the like have this information.
The spot settlement, also known as the horizon, is at least one or two days away from the trade date. The date of the trade is called the spot trade. The transaction should push through regardless of what happens between the settlement date and the transaction initiation date.
Spot rates and forward rates
A forward rate is the price of a financial transaction that shall happen in the future. The spot rate plays a significant role in forward rates. Why? The basis of the asset’s future value is its current value and the risk-free rate and time before the contract’s maturity date. Hence, if you know all of these, you can extend an unknown spot rate.
Spot rates and futures prices
Have you heard or the terms contango and backwardation? Contango means the futures price decline to match the lower spot price. Contango is more on short positions because the futures value declines as the contract expiration date gets closer then converges with the lower spot price.
On the other hand, backwardation means the futures price increases to match with the higher spot price. Backwardation is more on long positions because the futures price rises to meet the higher spot price as the contract expiration date gets closer.
We are mentioning these because the difference between futures prices and spot prices is crucial, especially for futures traders. The futures market can go from backwardation to contango or the other way around. They can also stay in any state for shorter or longer periods.
Capping off with a summary
A spot rate is a real-time and on-the-dot supply and demand of the market for an asset ready for immediate delivery in layman’s terms. Spot rates for various assets help determine futures prices. Also, spot rates during signing can become references for delivery contracts.