In finance, a spot contract, spot transaction, or simply spot, is a contract of buying or selling a commodity, security or currency for immediate settlement (payment and delivery) on the spot date, which is normally two business days after the trade 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 but delivery and payment will occur at a future date.
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👉 Spot price in the context of Commodities exchange
A commodities exchange is an exchange, or market, where various commodities are traded. Most commodity markets around the world trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil, and metals). Trading includes various types of derivatives contracts based on these commodities, such as forwards, futures and options, as well as spot trades (for immediate delivery).
A futures contract provides that an agreed quantity and quality of the commodity will be delivered at some agreed future date. A farmer raising corn can sell a futures contract on his corn, which will not be harvested for several months, and gets a guarantee of the price he will be paid when he delivers; a breakfast cereal producer buys the contract and gets a guarantee that the price will not go up when it is delivered. This protects the farmer from price drops and the buyer from price rises. Speculators and investors also buy and sell these contracts to try to make a profit; they provide liquidity to the system.
In this Dossier
Spot price in the context of Commodity market
A commodity market is a market that trades in the primary economic sector rather than manufactured products. The primary sector includes agricultural products, energy products, and metals. Soft commodities may be perishable and harvested, while hard commodities are usually mined, such as gold and oil. Futures contracts are the oldest way of investing in commodities. Commodity markets can include physical trading and derivatives trading using spot prices, forwards, futures, and options on futures. Farmers have used a simple form of derivative trading in the commodities market for centuries for price risk management.
A financial derivative is a financial instrument whose value is derived from a commodity termed an underlier. Derivatives are either exchange-traded or over-the-counter (OTC). An increasing number of derivatives are traded via clearing houses some with central counterparty clearing, which provide clearing and settlement services on a futures exchange, as well as off-exchange in the OTC market.
Spot price in the context of Oil speculation
The price of oil, or the oil price, generally refers to the spot price of a barrel (159 litres) of benchmark crude oil—a reference price for buyers and sellers of crude oil such as West Texas Intermediate (WTI), Brent Crude, Dubai Crude, OPEC Reference Basket, Tapis crude, Bonny Light, Urals oil, Isthmus, and Western Canadian Select (WCS). Oil prices are determined by global supply and demand, rather than any country's domestic production level.
Spot price in the context of Gold bar
A gold bar, also known as gold bullion or a gold ingot, is a quantity of refined metallic gold that can be shaped in various forms, produced under standardized conditions of manufacture, labeling, and record-keeping. Larger varieties of gold bars, produced by casting molten metal into molds, are called ingots. Smaller bars are often created through minting or stamping from rolled gold sheets. Central banks typically hold the standard 400-troy-ounce (438.9-ounce; 27.4-pound; 12.4-kilogram) Good Delivery gold bar in their gold reserves and it is widely traded among bullion dealers. Additionally, the kilobar, weighing 1,000 grams (32.15 troy ounces), and the 100-troy-ounce (109.7-ounce; 6.9-pound; 3.1-kilogram) gold bar are popular for trading and investment due to their more manageable size and weight. These bars carry a minimal premium over the spot price of gold, facilitating small transfers between banks and traders. While most kilobars have a flat appearance, a preference for brick-shaped bars exists among some investors, particularly in Europe.
Spot price in the context of Strike price
In finance, the strike price (or exercise price) of an option is a fixed price at which the owner of the option can buy (in the case of a call), or sell (in the case of a put), the underlying security or commodity. The strike price may be set by reference to the spot price, which is the market price of the underlying security or commodity on the day an option is taken out. Alternatively, the strike price may be fixed at a discount or premium.
The strike price is a key variable in a derivatives contract between two parties. Where the contract requires delivery of the underlying instrument, the trade will be at the strike price, regardless of the market price of the underlying instrument at that time.
Spot price in the context of Forward price
The forward price (or sometimes forward rate) is the agreed upon price of an asset in a forward contract. Using the rational pricing assumption, for a forward contract on an underlying asset that is tradeable, the forward price can be expressed in terms of the spot price and any dividends. For forwards on non-tradeables, pricing the forward may be a complex task.