What is a Spot Price?
The spot price is the current market price of a security, currency, or commodity and it had to be 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 was to “lock” the desired spot price of a commodity at some future date because prices constantly change due to fluctuations in supply and demand.
In addition, 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 imply the immediate settlement (payment and delivery) of an asset, while futures prices delay the payment and delivery to predetermined future dates.
Spot and futures prices are related to each other. The spot price can be below the futures price. The situation is known as a contango. A 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. The situation is considered normal in the commodity’s markets when the futures price is expected to eventually converge with the spot 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: