What is a Spot Price?
The spot price is the current market price of a security, currency, or commodity available to be bought/sold for immediate settlement. In other words, it is the price at which the sellers and buyers value an asset right now.
Although spot prices can vary by time and geographic regions, the prices are fairly homogenous in financial markets. The uniformity of prices across different financial markets does not allow market participants to exploit arbitrage opportunities from significant price disparities for the same asset in different markets.
Most frequently, spot prices are considered in the context of forwards and futures contracts. One of the reasons for the creation of such financial contracts is to “lock in” the desired spot price of a commodity at some future date because prices constantly change due to fluctuations in supply and demand.
The spot price is a key variable in determining the price of a futures contract. It can indicate expectations about fluctuations in future commodity prices.
Spot Price vs. Future Price
The main difference between spot and futures prices is that spot prices are for immediate buying and selling, while futures contracts delay payment and delivery to predetermined future dates.
The spot price is usually below the futures price. The situation is known as contango. Contango is quite common for non-perishable goods with significant storage costs.
On the other hand, there is backwardation, which is a situation when the spot price exceeds the futures price.
In either situation, the futures price is expected to eventually converge with the current market price.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To learn more about related topics, check out the following resources: