Spot

The spot price, also called spot rate, is the price that is quoted for immediate payment and delivery. In the case of foreign exchange the settlement usually takes place one or two business days at er the trade day. In the spot market for commodities, the time span from the trade day to the settlement day can take up to one month.

This is in contrast with a forward or futures contract, where the price is set today but the delivery will occur at a fixed date in the future, often 3–6 months. Interestingly, even the so-called spot indices do not measure the actual spot prices but rather the prices of nearby futures contracts.

This is because the spot market is highly illiquid for some commodities, such as crude oil, and thus has to be approximated. h e spot-future parity states that the connection between the spot price St and the futures price Ft,T with maturity at time T is as follows: Ft,T = St e(r+c–y)T, where r is the risk-free interest rate.

In the case of commodities, the storage costs c and the convenience yield y from holding y the commodity in storage have to be considered as well. If the equation is not met, a risk-free profit can be realized. Although the futures price Ft,T theoretically should be an unbiased expectation of future spot prices E[ST], forecasts based on spot prices have been found to be as good as forecasts based on futures prices. This can be traced back to market imperfections such as transaction costs, tax distortions, and unequal distribution of information.

Spot
Spot
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