Spot price

Spot price

The spot price or spot rate of a commodity, a security or a currency is the price that is quoted for immediate (spot) settlement (payment and delivery). Spot settlement is normally one or two business days from trade date. This is in contrast with the forward price established in a forward contract or futures contract, where contract terms (price) are set now, but delivery and payment will occur at a future date. Spot rates are estimated via the bootstrapping method, which 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.

For securities, the synonymous term cash price is more often used.

Spot prices and future price expectations

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 (e.g., gold), the spot price reflects market expectations of future price movements. 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 price would yield an arbitrage opportunity and riskless profit (see rational pricing for the arbitrage mechanics).

In contrast, a perishable commodity does not 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 prices 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.

A simple example: even if you know tomatoes are cheap in July and will be expensive in January, you can't buy them in July and take delivery in January, since they will spoil before you can take advantage of January's high prices. 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).

See also

* Forward price
* Forward contract
* Rational pricing

External links

* [ Current Gold Spot Price - USD/oz]

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Look at other dictionaries:

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  • spot price — The price available in the spot market. American Banker Glossary The current market price of the actual physical commodity. Also called cash price. Current delivery price of a commodity traded in the spot market, in which goods are sold for cash… …   Financial and business terms

  • Spot price — The current marketprice of the actual physical commodity. Also called cash price. The New York Times Financial Glossary * * * spot price spot price ➔ price1 * * * spot price UK US noun [C] FINANCE ► the price of a product that is being sold in a… …   Financial and business terms

  • spot price — noun the current delivery price of a commodity traded in the spot market • Syn: ↑cash price • Hypernyms: ↑price, ↑terms, ↑damage * * * noun : the price of spot goods contrasted with …   Useful english dictionary

  • Spot Price — The current price at which a particular security can be bought or sold at a specified time and place. A security s spot price is regarded as the explicit value of the security at any given time in the marketplace. In contrast, a securities… …   Investment dictionary

  • spot price — UK / US noun [countable] Word forms spot price : singular spot price plural spot prices business the price at which a particular product can be bought or sold at a specific time and place …   English dictionary

  • spot price — / spɒt praɪs/, spot rate / spɒt reɪt/ noun a current price or rate for something which is delivered immediately (also called ‘cash price’) ▪▪▪ ‘…the average spot price of Nigerian light crude oil for the month of July was 27.21 dollars per… …   Dictionary of banking and finance

  • spot price — the price of spot goods or of commodities on the spot market. * * * …   Universalium

  • Spot price —   The price for a one time open market transaction for near term delivery of a specific quantity of product at a specific location where the commodity is purchased at current market rates. See also spot market terms associated with specific… …   Energy terms

  • spot price — /ˈspɒt praɪs / (say spot pruys) noun (in commodities trading) the price agreed on for immediate delivery of the commodity …  

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