
Spot Exchange Rate
Table of Contents What Is the Spot Exchange Rate? Understanding the Spot Rate Spot Rate Transactions The Spot Market How to Execute a Spot Exchange A spot exchange rate is the current price level in the market to directly exchange one currency for another, for delivery on the earliest possible value date. The spot exchange rate is usually decided through the global foreign exchange market where currency traders, institution and countries clear transactions and trades. Generally, the spot rate is set by the forex market, but some countries actively set or influence spot exchange rates through mechanisms like a currency peg. Countries with large foreign currency reserves are much better positioned to influence their domestic currency's spot exchange rate.

What Is the Spot Exchange Rate?
A spot exchange rate is the current price level in the market to directly exchange one currency for another, for delivery on the earliest possible value date. Cash delivery for spot currency transactions is usually the standard settlement date of two business days after the transaction date (T+2).



Understanding the Spot Exchange Rate
The spot exchange rate is best thought of as how much you would have to pay in one currency to buy another at this moment in time. The spot exchange rate is usually decided through the global foreign exchange market where currency traders, institution and countries clear transactions and trades. The forex market is the largest and most liquid market in the world, with trillions of dollars changing hands daily. The most actively traded currencies are the U.S. dollar, the euro — which is used in many continental European countries including Germany, France, and Italy — the British pound, the Japanese yen and the Canadian dollar.
Trading takes place electronically around the world between large, multinational banks. Other active market participants include corporations, mutual funds, hedge funds, insurance companies and government entities. Transactions are for a wide range of purposes, including import and export payments, short- and long-term investments, loans and speculation.
Some currencies, especially in developing economies, are controlled by the government that sets the spot exchange rate. For instance, the central government of China sets a currency peg that keeps the Yuan within a tight trading range against the U.S. dollar.
Spot Exchange Rate Transactions
For most spot foreign exchange transactions, the settlement date is two business days after the transaction date. The most common exception to the rule is the U.S. dollar vs. the Canadian dollar, which settles on the next business day. Weekends and holidays mean that two business days is often far more than two calendar days, especially during the Christmas and Easter holiday season.
On the transaction date, the two parties involved in the transaction agree on the price, which is the number of units of currency A that will be exchanged for currency B. The parties also agree on the value of the transaction in both currencies and the settlement date. If both currencies are to be delivered, the parties also exchange bank information. Speculators often buy and sell multiple times for the same settlement date, in which case the transactions are netted and only the gain or loss is settled.
The Spot Market
The foreign exchange spot market can be very volatile. In the short term, rates are often driven by news, speculation and technical trading. In the long term, rates are generally driven by a combination of national economic fundamentals and interest rate differentials. Central banks sometimes intervene to smooth the market, either by buying or selling the local currency or by adjusting interest rates. Countries with large foreign currency reserves are much better positioned to influence their domestic currency's spot exchange rate.
How to Execute a Spot Exchange
There are a number of different ways in which traders can execute a spot exchange, especially with the advent of online trading systems. The exchange can be made directly between two parties, eliminating the need for a third party. Electronic broking systems may also be used, where dealers can make their trades through an automated order matching system. Traders can also use electronic trading systems through a single or multi-bank dealing system. Finally, trades can be made through a voice broker, or over the phone with a foreign exchange broker.
Related terms:
Business Day
A business day is a popular unit of time measure that typically refers to any day in which normal business operations are conducted. read more
Cash Delivery
Cash delivery is a settlement between the parties of certain derivatives contracts, requiring the seller to transfer the monetary value of the asset. read more
Currency Forward
A currency forward is a binding contract in the foreign exchange market that locks in the exchange rate for the purchase or sale of a currency on a future date. A currency forward is essentially a hedging tool that does not involve any upfront payment. read more
Currency Futures
Currency futures are a transferable contract that specifies the price at which a currency can be bought or sold at a future date. read more
Currency Pair
A currency pair is the quotation of one currency against another. read more
Euro
The European Economic and Monetary Union is comprised of 27 member nations, 19 of whom have adopted the euro (EUR) as their official currency. read more
Foreign Currency Swap
A foreign currency swap is an agreement to exchange currency between two foreign parties, often employed to obtain loans at more favorable interest rates. read more
Foreign Exchange Market
The foreign exchange market is an over-the-counter (OTC) marketplace that determines the exchange rate for global currencies. read more
Foreign Exchange (Forex)
The foreign exchange (Forex) is the conversion of one currency into another currency. read more
Forex Trading Strategy
A forex trading strategy is a set of analyses that a forex day trader uses to determine whether to buy or sell a currency pair. read more