What is a Spot Contact, Spot Deal and Spot Rate?
A spot deal is essentially a transaction that is booked, confirmed and settled immediately.
In more detail a spot deal is an agreement between a client and a foreign exchange broker to sell one currency and buy another currency at an agreed exchange rate, for settlement on the spot date.
A spot deal consists of agreeing an exchange rate after specifying a base currency and a variable currency. The base currency is the currency the client wishes to sell; it is located on the left side of any quote whereas the variable currency will be the currency the client wishes to buy and is located on the right side of any quote. Therefore GBP/USD would mean that the client is looking to sell GBP and buy USD.
A spot deal is an immediate transfer of funds and can be used for:
- Buying a property overseas
- Sending funds to friends or relatives
- Paying off a loan or credit card
- Sending savings back home
- Paying for holiday accommodation
- Large purchases such as a boat, car, plane
- Overseas investments
- Business payments – such as invoices for Importers/Exporters
The standard settlement timeframe for a Spot deal is T+2. Transaction date plus 2 days for expected delivery. It is one of the most common types of deals used to transfer money overseas immediately.
When would you use a spot contract for your business?
Typically, a business which deals in large volumes of foreign currency will have adopted a strategy for their Foreign exchange. This could mean they have numerous contracts in place to hedge their currency foreign exchange activity. Many however will have more straightforward foreign exchange needs and simply transfer money when needed. Businesses typically use spot contracts for the follow –
- Purchase of materials
- Investing in a project overseas
- Purchase of good from overseas
- Paying an international invoice
- Transferring a commission payment to a colleague
- Receiving a fee from employer
- Transferring money to an overseas office
How do you book a spot rate with a Foreign exchange broker?
Once your account has been opened with a foreign exchange broker you will normally have the choice to arrange a spot contract either over the telephone, online or via an app immediately. If you chose to book a spot rate over the phone you will agree a trading rate. Be made of aware of the base currency needed to obtain the amount of foreign currency at the agreed rate. Once confirmed, the foreign exchange broker will supply you with referenced account details to receive the base currency or allow you to credit your account via debit card. If you decide to pay via a transfer, you’ll have to arrange this with you bank. Your foreign exchange broker will also add your beneficiary account details over the phone or online in order to credit the international beneficiary.
For those trading online the process is very similar except the rate will be booked online, the referenced beneficiary details emailed or accessed on the trading platform and the beneficiary details sourced on the platform.
When do you send the money to complete a Spot contract?
The money to complete your spot contract you will have to send money within 2 days. If funds aren’t received, you will typically receive a reminder form your foreign exchange broker. Once funds have been received funds will be sent either the same day or the next day subject to the location of your beneficiary account or the cut off time of your foreign exchange broker.
What is the difference between FX spot and FX forward contract?
Spot and forward contract are used throughout the financial services sectors and are used to book different contracts. Within foreign exchange the spot contract is used to book an exchange rate for a near immediate delivery. Essentially buying an exchange rate and trading immediately.
A forward contract is slightly different whereby it is similar to a spot contract except the funds are paid later. Therefore, individuals and businesses can book todays rate (spot) and hold that rate for up to a year and pay within the agreed timeframe.
Can a spot contract be booked online?
The vast majority of leading foreign exchange brokers will offer an online system allowing you or your business to book a spot contract online. Its advisable if trading a significant amount of money to trade over the phone in case the market is expecting positive movements on your required currency pair.
Advantages of a spot Contract
The spot contract allows you to send money overseas immediately which is advantageous if funds are required quickly. If sending money within Europe of a country which uses the SEPA route you currency should arrive either the same or next day.
Disadvantages of a spot contract
The disadvantages are more impactful if you or your business is making more regular or larger transfers. If your Foreign exchange transfers exceed more than £50,000 or currency equivalent its worth proactively managing your transfer.
If you are using a spot contract to settle an overseas invoice which typically has a 30 to 90-day invoice date you could have lost out. Foreign exchange rates can fluctuate significantly over 30-90 days meaning you might have missed a better opportunity to convert your currency.
What is a spot contract?
A spot contract is whereby an exchange rate is agreed between a buyer and seller for immediate delivery.
What is the difference between Spot and forward contract?
A spot contract is agreed and sent within a few days. A forward contract allows you to agree an exchange rate or price for a deliverable day in the future.
What is the value date for a spot contract?
Once a spot contract is agreed your foreign exchange broker or bank will expect the funds within 2-3 working days.
How can I arrange a spot contract?
A spot contract can be agreed over the phone or online via your bank or foreign exchange broker.