Assignment on Spot Market(All About)

SPOT MARKET
What Is a Spot Market?
The spot market is where financial instruments, such as commodities, currencies, and
securities, are traded for immediate delivery. Delivery is the exchange of cash for the
financial instrument. A futures contract, on the other hand, is based on the delivery of
the underlying asset at a future date.
Exchanges and over-the-counter (OTC) markets may provide spot trading and/or
futures trading.
Spot Market
How Spot Markets Work
Spot markets are also referred to as “physical markets” or “cash markets” because
trades are swapped for the asset effectively immediately. While the official transfer of
funds between the buyer and seller may take time, such as T+2 in the stock market and
in most currency transactions, both parties agree to the trade “right now.” A non-spot, or
futures transaction, is agreeing to a price now, but delivery and transfer of funds will
take place at a later date.
Futures trades in contracts that are about to expire are also sometimes called spot
trades since the expiring contract means that the buyer and seller will be exchanging
cash for the underlying asset immediately.
Spot Price
The current price of a financial instrument is called the spot price. It is the price at which
an instrument can be sold or bought immediately. Buyers and sellers create the spot
price by posting their buy and sell orders. In liquid markets, the spot price may change
by the second, as orders get filled and new ones enter the marketplace.
The word "spot" comes from the phrase "on the spot", where in these markets you can
purchase an asset on the spot.
Spot Market and Exchanges
Exchanges bring together dealers and traders who buy and sell commodities, securities,
futures, options, and other financial instruments. Based on all the orders provided by
participants, the exchange provides the current price and volume available to traders
with access to the exchange.
 The New York Stock Exchange (NYSE) is an example of an exchange where
traders buy and sell stocks for immediate delivery. This is a spot market.
 The Chicago Mercantile Exchange (CME) is an example of an exchange where
traders buy and sell futures contracts. This is a futures market and not a spot
market.

Spot Market and Over-the-Counter
Trades that occur directly between a buyer and seller are called over-the-
counter (OTC). A centralized exchange does not facilitate these trades. The foreign
exchange market (or forex market) is the world's largest OTC market with an average
daily turnover of $5 trillion.
In an OTC transaction, the price can be either based on a spot or a future price/date. In
an OTC transaction the terms are not necessarily standardized, and therefore, may be
subject to the discretion of the buyer and/or seller. As with exchanges, OTC stock
transactions are typically spot trades, while futures or forward transactions are often not
spot.
Example of a Spot Market
Let’s say an online furniture store in Germany offers a 30% discount to all international
customers who pay within five business days after placing an order.
Danielle, who operates an online furniture business in the United States, sees the offer
and decides to purchase $10,000 worth of tables from the online store. Since she needs
to buy euros for (almost) immediate delivery and is happy with the current
EUR/USD exchange rate of 1.1233, Danielle executes a foreign exchange transaction
at the spot price to buy the equivalent of $10,000 in euros, which works out to be
€8,902.34 ($10,000/1.1233). The spot transaction has a settlement date of T+2, so
Danielle receives her euros in two days and settles her account to receive the 30%
discount.
Advantages and Disadvantages of Spot Markets
The spot price is the current quote for immediate purchase, payment, and delivery of a
particular commodity. This means that it is incredibly important since prices in
derivatives markets such as for futures and options will be inevitably based on these
values. Spot markets also tend to be incredibly liquid and active for this reason.
Commodity producers and consumers will engage in the spot market and then hedge in
the derivatives market.
A disadvantage of the spot market, however, is taking delivery of the physical
commodity. If you buy spot pork bellies, you now own some live hogs. While a meat
processing plant may desire this, a speculator probably does not. Another downside is
that spot markets cannot be used effectively to hedge against the production or
consumption of goods in the future, which is where derivatives markets are better-
suited.
Pros
 Real-time prices of actual market prices
 Active and liquid markets
 Can take immediate delivery if desired
Cons
 Must take physical delivery in many cases
 Not suited for hedging

Spot Market FAQs
Advantages of Spot Markets
 Spot markets facilitate trading in a transparent environment,
where transactions occur at prevailing prices that are public
information and known to all parties. Basically, it is easier to
execute spot market contracts.
 Traders in spot markets can hold and find a better deal if they
are not satisfied with current prices and terms.
 Trades are done and completed on the spot.
 There may be no minimum capital requirements in spot market
transactions compared to some contracts on the futures
market that have minimum investment amounts for a single
contract.
Disadvantages of Spot Markets
 Due to the volatility of some financial instruments and
commodities, investors can buy on the spot at inflated prices
before assets find their “true price.” Hence, trading on the spot
market can present significant risks, especially for volatile
assets.