Definition
The spot market is a public financial market in which financial instruments or commodities are traded for immediate delivery. These transactions occur ‘on the spot,’ meaning the delivery and settlement take place promptly, typically within two business days for foreign exchange and seven days for commodities.
Examples
- Foreign Exchange Market: When travelers exchange currency at an airport kiosk, they are engaging in spot market transactions because they receive the foreign currency immediately.
- Commodities Market: A company purchasing crude oil and taking delivery within a week is conducting a spot market transaction.
Frequently Asked Questions (FAQs)
What is the primary difference between the spot market and the futures market?
The primary difference is the timing of delivery. In the spot market, the transaction and delivery occur immediately. In the futures market, delivery occurs at a later, specified date.
Can the spot market be used for speculation?
Yes, traders can use the spot market for speculation, but it is generally more common in futures markets due to the longer lead times providing a platform for leveraging price movements.
What are “spot prices”?
Spot prices are the current prices at which a given asset can be bought or sold for immediate delivery.
How does the spot market affect commodity prices?
Spot market prices often serve as benchmarks for commodity prices and can influence prices in future contracts.
Forward Dealing
Forward dealing refers to transactions where the terms of trade are agreed upon now, but the delivery and payment occur at a future date specified in the contract.
Futures Contract
Futures contract is a legal agreement to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future.
Cash Market
The cash market is synonymous with the spot market but the term is often used in commodity and securities markets to emphasize the trade occurs ‘for cash’ with immediate settlement.
Online References
- Investopedia - Spot Market
- The Balance - What is the Spot Market?
- CME Group - Spot and Futures Markets
Suggested Books for Further Studies
- “Commodity Markets and Derivatives” by Carl E. Walsh
- “Foreign Exchange: A Practical Guide to the FX Markets” by Tim Weithers
- “Options, Futures and other Derivatives” by John C. Hull
- “The Economics of Commodity Markets” by Peter Moles and Nicholas Terry
Accounting Basics: “Spot Market” Fundamentals Quiz
### Which of the following best describes spot market transactions?
- [ ] Agreements for future delivery.
- [ ] Speculation in financial markets.
- [x] Transactions involving immediate delivery.
- [ ] Purchases of real estate.
> **Explanation:** Spot market transactions involve immediate delivery of the commodity or financial asset.
### Within how many days must foreign exchange transactions be settled in the spot market?
- [ ] One day
- [ ] Three days
- [x] Two business days
- [ ] Seven days
> **Explanation:** Transactions in the foreign exchange spot market usually must be settled within two business days.
### Which of the following markets is an example of the spot market?
- [ ] Real estate market
- [ ] Cryptocurrency futures
- [x] Foreign exchange
- [ ] Stock market
> **Explanation:** The foreign exchange market is an example of the spot market where immediate delivery of currency happens.
### What term is another name for the spot market?
- [ ] Futures market
- [ ] Options market
- [ ] Derivatives market
- [x] Cash market
> **Explanation:** The spot market is also known as the cash market because transactions occur for cash with immediate settlement.
### For commodities, how many days does delivery typically take in the spot market?
- [ ] Two days
- [x] Seven days
- [ ] Ten days
- [ ] Fourteen days
> **Explanation:** In the spot market for commodities, delivery typically takes place within seven days.
### How do spot prices affect future contracts?
- [x] They serve as benchmarks.
- [ ] They don't affect futures at all.
- [ ] They only affect stock prices.
- [ ] They are unrelated to market trends.
> **Explanation:** Spot prices often serve as benchmarks for future contracts and can influence the pricing.
### Can traders use the spot market for long-term investments?
- [ ] Yes, always
- [x] No, it's typically used for immediate needs
- [ ] Only for commodities
- [ ] Only for currencies
> **Explanation:** The spot market is typically used for immediate financial needs rather than long-term investments.
### What are "spot prices"?
- [x] The current price at which assets can be bought or sold for immediate delivery.
- [ ] Future prices of commodities.
- [ ] Prices in real estate markets.
- [ ] Government regulation fees.
> **Explanation:** Spot prices are the current prices at which assets can be bought or sold for immediate delivery.
### What type of transactions is not suitable for the spot market?
- [ ] Short-term trades
- [ ] Hedging strategies
- [ ] Arbitrage opportunities
- [x] Long-term future deliveries
> **Explanation:** Long-term future deliveries are not suitable for the spot market as it focuses on immediate delivery and settlement.
### How often are spot prices updated?
- [x] Continuously throughout the trading day
- [ ] Once a week
- [ ] Monthly
- [ ] Annually
> **Explanation:** Spot prices are continuously updated throughout the trading day reflecting real-time supply and demand.
Thank you for exploring the spot market with us and testing your knowledge through our interactive quiz! Continue to expand your understanding of financial markets and concepts for a solid foundation in accounting and finance.
