What’s the Forex Spot Rate?
The Forex spot rate is the current exchange rate at which a currency pair can be purchased or sold. This is the prevailing quote for any given currency pair from a forex broker. Forex currency trading is the rate that most traders use when trading with an online retail forex broker.
- This rate is a periodically published continuous quotation of exchange rates for all currency pairs.
- The spot rate is different from the forward rate or the swap rate.
- The spot rate is not discounted for the delay in delivery that is added to the overnight rollover credit.
Understanding the rate of Forex Spot
The forex spot rate is the most frequently quoted price for currency pairs. It is the basis of the most frequent transaction in the forex market , i.e. individual forex trading. This rate is much more widely published than the rate for forward exchange contracts or forex swaps. The spot forex rate differs from the forward rate in that it prices the value of currencies compared to foreign currencies today, rather than at some point in the future.
The global forex spot market has a daily turnover of more than $5 trillion. Which makes it higher in nominal terms than both the equity and bond markets. Tariffs are set out in continuous, real-time quotes published by a small group of large banks that trade the interbank rate. From there, rates are published by forex brokers all over the world.
Spot rates do not take into account the delivery of forex contracts. Forex contract delivery is oblique to most forex retail traders. But brokers manage the use of currency futures contracts that underpin their trading operations. Brokers have to roll out those contracts every month or week and pass on the costs to their customers.
In this way, forex dealers incur risk management costs while providing liquidity to their customers. Most of the time, they use a bid-ask spread and lower rollover credit (or higher rollover debit depending on the currency pair you hold and whether you’re long or short) to offset those costs.
Delivery of Forex Contract
The standard delivery time for a forex spot price is T+2 days. If the counterparty wishes to delay delivery, they will have to enter into a forward contract. Most of the time, it’s the Forex dealers who have to manage it. For example, if a EUR / USD transaction is carried out at 1.1550, this will be the rate at which the currency is exchanged on the spot date. However, if European interest rates are lower than those in the U.S., this rate will be adjusted higher to reflect this difference. Thus, if either the dealer or his counterparty wishes to own EUR and short USD for a period of time, it will cost them more than the spot rate. It should be noted that the delivery times for spot rates are not standard and may vary for some pairs.
Although the forex spot rate calls for delivery within two days, this is rarely the case in the trading community. Retail traders holding a position for more than two days will have their trades “reset” by the broker, i.e. closed and reopened at the same price, just before the two-day deadline. However, when these currencies are rolled, a premium or discount will be added in the form of an increased rollover fee. The size of this fee depends on the difference in interest rates, through a short-term FX swap.
Since the spot rate is the delivery rate without any interest rate differential adjustment, it is the rate quoted in the retail market. The retail forex market is dominated by travelers who wish to buy and sell foreign currency. Whether it is through a bank or a currency exchange.
Unlike a spot contract, a forward contract, or a futures contract, involves a contract agreement on the current date of delivery and payment at a specified future date. In contrast to the spot rate, the forward rate is used to quote a financial transaction taking place on a future date. It is also the settlement price of a forward contract. However, depending on the security being traded, the forward rate may be calculated using the spot rate. Forward rates are calculated from the spot rate and adjusted for the cost of the carry to determine the future interest rate. Which is equivalent to the overall return of a longer-term investment with a strategy of rolling over a shorter-term investment.