Spot market is a financial market in which the immediate transactions of financial instruments is done in order to get immediate liquidity. A spot market can be an exchange market in which securities are traded or ran over the counter market, such as a forex market which involves direct agreements between the parties. These transactions take place at the current exchange rates which are called spot rates and the transactions are called as spot transactions.
How does a spot transaction takes place?
A spot transaction or a spot contract is a transaction in which exchange of one currency for another currency takes place at a specified rate. It takes two days for the processing of transaction by the banks due to different geographical areas and currency cut off times. This time taken is known as ‘spot cover’.
The date on which the dealing takes place is called transaction date’ and the date on which the final settlement takes place is called ‘settlement date’ or ‘value date’. Some urgent transactions are even processed in one day and those transactions are called as ‘one day value transactions’.
The rate of exchange of currency is based on the price at the time of settlement of the deal. It does not change with the fluctuations happening in these two days. Hence, the traders are volatile to equal probability of profits or loss. The spot transactions, unlike future transactions are done to obtain instant cash.
The above are the details regarding spot markets, spot transactions, spot covers and spot dates.