Although we have covered extensively on our site the nature of different types of Forex contract, one of the commonest questions we get relates to the differences between them.
So, by way of a refresher, we’ll briefly outline here again the nature of spot contracts.
The first thing to keep in mind is that the term ‘spot contracts’ means a slightly different thing to the published ‘spot rate’.
Strictly speaking, ‘spot contract’ is used to signify a price agreed then-and-there for many forms of exchange including currency, with settlement being made within two business days. You may sometimes see a ‘spot rate’ published in the press or on the internet but remember that in that context, you’re normally looking at wholesale interbank market prices.
These interbank spot rates are never available to retail foreign exchange transactions, whether they are commercial or private in nature.
Spot contracts is the term used to signify a situation where you are asking for an exchange rate that will be immediately applicable to an amount of money you wish to convert immediately in a retail market environment. So, if you have just received an amount in say U.S. dollars and wish to convert it immediately to Australian dollars, you can ask for a spot contract price.
If you agree the deal, you will need to make the U.S. dollars payment normally within two business working days in order to obtain the amount of agreed Australian dollars.
The difference you may see between the published wholesale ‘spot prices’ and the rate you receive for your spot contracts is partly due to wholesale market factors and partly your bank or Forex provider’s profit margin.
Retail spot rates are usually only valid for a limited period of time. If you are looking to enter into a commercial negotiation as an importer or exporter, where the eventual conversions will need to be done at some time in the future, you should be talking to us or your chosen provider about forward contracts. There, the conversion rate that will be given to you will be valid at a specified time in the future.
If you ever have any doubts or uncertainty as to what Forex terminology means, please don’t hesitate to give us a call and will be happy to clarify!
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