Spot rate
Family XII · Other terms
Not to be confused with exchange rate, forward contract, currency pair.
Spot rate is the price quoted for a transaction that settles on the spot date, usually within one or two business days depending on the asset and market convention. It reflects the current market value of the asset for near-immediate exchange, and it forms the base from which forward rates are calculated. In foreign exchange, the spot rate is the rate for buying or selling currency for delivery on the spot date.
Settlement and Quotation
The spot rate applies to trades that settle on the spot date, which is typically two business days after the trade date (T+2) for most currency pairs, though some pairs settle T+1. The exact convention varies by market and instrument. For equities, the spot date is usually the trade date itself or the next business day, depending on the settlement cycle in that jurisdiction.
Spot rates are quoted continuously during market hours and are influenced by supply and demand, interest rates, and economic conditions. They serve as the reference point for pricing forwards, swaps, and other derivatives.
Worked Example
Suppose a trader buys 1,000,000 euros against the US dollar at a spot rate of 1.1000. The trade date is Monday, and the spot date is Wednesday (T+2). The calculation of the dollar amount is as follows:
On Wednesday, the trader delivers 1,100,000 US dollars and receives 1,000,000 euros.
Spot Rate vs. Forward Rate
The spot rate contrasts with the forward rate, which is the price agreed today for settlement at a future date. The forward rate is derived from the spot rate adjusted for the interest rate differential between the two currencies over the forward period. If the spot rate is 1.1000 and the interest rate differential implies a forward premium, the forward rate might be higher or lower than the spot rate.
Spot transactions involve immediate exchange, while forward transactions lock in a rate for future delivery, often used for hedging or speculation.
Often confused with
- exchange rate
- An exchange rate is the price of one currency expressed in units of another, determined in foreign-exchange markets and used to convert values between the two monetary areas.
- forward contract
- A forward contract is a bilateral, privately negotiated agreement to buy or sell an underlying asset at a specified price on a future date, with terms set by the two parties rather than a central exchange.
- currency pair
- A currency pair is a quotation of one currency against another, expressed as the amount of the quote currency required to buy one unit of the base currency.