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In financea spot contractspot transactionor simply spotis a contract of buying or selling a commoditysecurity or currency for immediate settlement payment and delivery on the spot datewhich is normally two business days after the trading contracts definition date.
The settlement price or rate is called spot price or spot rate. A spot contract is in contrast with a forward contract or futures contract where contract terms are agreed now trading contracts definition delivery and payment will occur at a future date. 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 commodity trading contracts definition.
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 model. For example, on a share the difference in price between the spot and forward is usually accounted for almost entirely by any dividends payable in the period minus the interest payable on the purchase price.
Any other cost price would yield an arbitrage opportunity and riskless profit see rational pricing for the arbitrage mechanics. In contrast, a perishable or soft commodity does trading contracts definition 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 trading contracts definition 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. Trading contracts definition finance, the spot date of a transaction is the trading contracts definition 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 marketspot 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.
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. For a trade with two dates, such as a foreign exchange swap, the first date is usually taken as the spot date. Spot rates are estimated via the bootstrapping methodwhich uses prices of the securities currently trading in market, that is, from the cash or coupon curve. The result is the spot curve, which exists for each of the various classes of securities.
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 and backwardation. From Wikipedia, the free encyclopedia. This article does not cite trading contracts definition sources. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. September Learn how and when to remove this template message.
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