The forex spot rate (or FX spot rate) is the amount it costs in one currency to buy another currency for immediate delivery.
There isn’t a single “spot” rate.
When opening a trade, FX traders are quoted two rates (or prices).
They have the choice of either buying att the indicated ask price(“go long”) or selling at the indicated bid price (“go short”).
The“exchange rate” for a currency pair usually refers to the “mid” price, which is the midpoint between bid and ask.
The exchange rate on a spot FX transaction will typically be higher or lower than the mid price, depending on whether it is filled at the bid or ask price.
While large players in the interbank FX market have the clout to negotiate and influence market bid and ask prices through trading activity, smaller players are more likely to be price takers.
For example, businesses and individuals trading FX through an intermediary such as a bank or broker may find their quoted spread between bid and ask prices is wider than the interbank’s market spread.
“Spot” Does NOT Mean “Immediately”
The term “spot” in relation to an FX transaction means “on the spot.” Colloquially, the term means having to come up with something right away.
But in the FX market, “on the spot” means “on the settlement date.”
This means traders do not need enough currency to settle a spot FX transaction as soon as it is executed.
The “settlement” or “value” date is the date on which the funds are physically exchanged.
This usually occurs two business days later than the transaction or “trade” date. This is expressed as “T+2”.
Some currency pairs may settle earlier. For example, the settlement date for USD/CAD and USD/TRY is one business day later than the transaction date or T+1.
The Chinese yuan and Russian ruble can both settle on the trade date, or T+0 (though T+1 settlement is more usual).
“Business days” exclude Saturdays, Sundays, and legal holidays in either currency of the traded pair.
Rolling Spot FX
Although spot FX trades always have a settlement date, most are not physically settled.
Traders typically want to profit from exchange rate differences on their transactions, rather than acquiring large quantities of currency.
To avoid physical settlement, traders simply “roll over” transactions on the settlement date.
They close off the transaction at the closing price and re-open it at the next day’s opening price, which, in effect, extends the settlement date by one day.
The difference between the closing and opening prices is taken as profit or loss.
Many FX brokers do this automatically for their customers.
Simultaneously entering into buy and sell trades with settlement one day apart is a type of FX swap widely used to roll over positions. It is known as “tomorrow next” or “tom-next.”
Although the two trades involved are spot trades, the swap price is calculated using interest rate differences in the same way as for a forward contract.