A guide to the spot rate: meaning and examples

The spot rate is used to trade markets immediately, rather than at a future date of expiry. Spot contracts are most common for currencies, stocks and commodities. Learn everything you need to know about how to trade spot rates.

What is the spot rate?

The spot rate, or spot price, is the value at which commodities, currencies and securities are traded for immediate settlement – whether that’s physically or in cash.

The spot rate is generated when buyers and sellers post the price at which they’re willing to bid for an asset or the price they want to ask for in exchange. When these values meet in the middle, it becomes the spot price. The rate will fluctuate in line with supply and demand.

Trading on the spot rate is popular among hedgers and speculators who are looking to take a position on current market rates in a bid to minimise loss to other positions or attempt to make a profit.

Spot rates can be traded both on exchanges and on over-the-counter markets. But the use of a spot rate usually comes down to the underlying asset.

What is a spot exchange contract?

A spot exchange contract is just the documentation for the purchase or sale of an asset at its spot price. This is in contrast with futures, forwards and options contracts, which are all agreements that involve exchanging an asset for settlement at a date in the future.

The difference between spot and futures contracts all comes down to the time factor. As spot contracts are settled immediately, the prices tend to see significant volatility when compared to contracts that have weeks or months until expiry. This is also due to the high levels of liquidity on spot markets.

While a spot transaction involves trading at the current price, or ‘on the spot’, the transfer of funds can take some time. The settlement date for spot transactions is often referred to by the abbreviations T+1, T+2 or T+3, which indicate the number of days the funds will be sent after the transaction. 

Most spot contracts are for physical delivery, but it is possible to cash settle a spot contract too – which is when no asset is delivered, but the transaction’s cash value is exchanged.

When you trade spot contracts with City Index, you’ll always be speculating on the underlying market price. This means you won’t ever need to worry about physical settlement, as your position would always be cash settled.

Which markets use spot rates?

Spot prices vary from asset to asset. For some markets, such as stocks, the spot price will always be the price shown. For other markets, such as commodities, most transactions take place via derivatives – such as futures contracts.

However, even in futures or options markets, the spot rate is still important as it’s used as the basis for pricing the contracts – by measuring the predicted difference between the current price and the value of the asset at a later date.

Foreign exchange spot contract

Foreign exchange spot contracts are the most basic type of agreement when it comes to trading currencies. It’s used most by individuals and businesses looking to buy or sell a specific currency at the going rate.

For example, a holidaymaker looking to purchase £100 worth of euros from a currency exchange will only ever pay the spot price, they won’t enter into a futures contract.

Currencies can also be bought as forward contracts, which is more common among those looking to hedge against currency rate risk.

How to trade the spot rate

Markets such as stocks and currencies will normally always be traded ‘on the spot’ so to take a position, all you’ll need to do is:

1. Open a City Index account, or log in if you’re already a customer
2. Search for the market you want to trade in our award-winning platform
3. Choose your position and size, and your stop and limit levels
4. Place the trade

Buying commodity spot markets is slightly different, as the standard market price you’d see is for futures contracts and not all brokers will offer spot rates.

At City Index, we offer non-expiring CFD markets on a variety of commodities to give you the equivalent of trading the spot rate. Click on the image below to see our spot markets offering. 

We price these markets using two sufficiently liquid futures contracts on the underlying commodity – which are usually the two with the nearest expiry date.

Learn more about our spot pricing.

Oil spot price example

A company is looking to purchase 1000 barrels of Brent Crude Oil. They believe the price will only rise in the future, so decide to buy it now at the spot price for immediate delivery.

The current price is $75. So, the firm would need to pay $75,000 to the seller to settle the trade.

Share spot price example

Share spot prices are simply the current value of the company’s share on the market. For example, if Apple’s shares are trading at $185, then that is the spot price.

If an investor wanted to buy 10 shares of Apple at its spot price, they’d need to have $1,850 to pay for the transaction. Once they owned the shares, they’d be able to sell them later, hopefully for a profit if the price increased.

Foreign exchange spot price example

The spot price of USD/JPY is 143.70, meaning it would cost 143.70 Japanese yen to purchase a single US dollar.

A trader wants to take a short position on the spot price of the USD/JPY pair, believing that it will fall in value in the near term. To do so, they use CFDs, opening a position to ‘sell’ 1,000 USD/JPY contracts at 143.70 at 10 cents per point of movement.

If the price of USD/JPY did fall, say to 143.50, that’s 20 pips of movement, meaning the position would’ve earned $2,000 (20x0.1x1000).

It’s important to remember though, that had the prediction been incorrect, and the market had risen by 20 pips instead, the trader would be facing a $2,000 loss.

Risks of spot rate trading

If you’re trading spot rates with CFDs, then you’re opening yourself up to leverage risk. To open a CFD position, you only need to put down a fraction of the full value of the trade, known as the margin. But your profit and loss will be based on the full exposure, meaning there’s the potential for both your gains and risk to be magnified beyond your initial deposit.

Creating a suitable risk management strategy, including the use of stop-loss and take-profit orders, is a vital part of CFD trading.

As we’ve seen, spot rates can be far more volatile than other prices. While volatility creates opportunities to profit, it can also increase your risk of loss.

If you’ve attached basic stop-loss orders to your trades, they could be subject to slippage – which is what happens when the market moves between the time the order is sent and when it is received.

To prevent this risk, you could use a guaranteed stop-loss order (GSLO), which will always execute your order at the level you’ve chosen. GSLOs are free to attach but will cost a premium of triggered.