Reviewed by Aug 27, 2020| Updated on
A spot rate is the quoted price for instant settlement on currency, security, or a commodity. The spot rate is sometimes referred to as the spot price. It is the market value of a security at the time of quoting the price. This value is arrived at by considering how much a buyer is willing to shell out in order to pay and how much the seller is expecting.
This generally depends on a variety of factors such as current market value, and anticipated market value in future. In simple words, the spot rate shows the demand and supply for assets in the market. As a result, the spot rates vary frequently and may at times change drastically, especially if a major event is happening or there is news on it.
Breaking Down Spot Rate:
In transactions of currencies, the spot rate is affected by the demands of businesses and individuals that wish to make transactions in a foreign currency and this is also dependent on the forex traders. The spot rate, when it comes to foreign exchange, is referred to as the benchmark rate, outright rate, or benchmark rate.
Apart from currencies, assets that are related to spot rates cover commodities such as crude oil, petrol & diesel, commodities, coffee, gold, copper, propane, lumber, wheat among other things, and bonds. Spot rates of commodities are based on the demand and supply of them, whereas spot rates are dependent on the zero-coupon rate for bonds.
Spot settlement that is the fund transfers that will complete a spot contract transaction will generally happen after one or two days from the date of trade, which is referred to as the horizon. The spot date is the day on which the settlement actually happen. No matter what happens in the market, the transactions are completed only at the spot rate at which the parties had agreed.