Spot Vs Forward rate- The Differences

 Settlement of funds and delivery of currency

o In spot transition -the second working day.
In Forward – future date except spot
o Example like spot rate is Monday 1 January 2022 than the settlement date will be 3 rd of
January, while in forward date like if one month forward than it will be 1 st February
 Spot rate always varies from forward rate it will be either higher of lower than it because of
influences like time value of money , demand and supply , RfR , chances of speculations , and
mainly arbitrage opportunist etc.
 Currency indication
o If forward is more than spot currency will be appreciating
o If it is lower than currency will be depreciating
 Exchange rates
o Spot has only one exchange rate
o Forward has multiple exchange rates
 In commodity market
o Spot rate or Spot Price
 Price of purchase of commodity- security etc.
 Immediate delivery on the spot date which is one or two business day after
trade date ,however spot rate is for immediate settlement of the contract.
o Forward rate
 If company needs mangoes in June they know in June they shall be buying at
higher price however they will prefer forward contract
 It inculcate agree on terms on current date and delivery and payment in future.
 In bond and currency market
o Some how different in both markets
o Like if bond is near to maturity than the interest will be lower than forward rate.
o In currency market spot is immediate exchange rate and forward is future exchange
rate.

Execution of spot and forward

 Direct execution -Between two traders with out a third party and they can execute via any
conversational method.
 Electronic broking system – an automated matching order system for foreign exchange
where two parties execute order
 Electronic trading system- single or multi bank system in which software’s are used for
execution of transaction between investors where they can access the financial markets.
 Inter-dealer voice broker- broker acts as a financial facilitator for currency transaction
between two dealers.

Uses
 As an example of how a spot contract works, suppose a distributor has to supply bananas in
July. She will pay the seller the spot price and get the bananas within two days. However, if
the merchant wants bananas at the end of December, but believes that the product will
become more expensive at this time of year due to growth and less general availability, he
may not be able to make a surprise purchase, as the risk of loss is too great. Is. A futures
contract is better suited for the purchase of bananas,
 Forward rates have been used to reflect short forecast future rates, future inflation rates,
and future currency depreciation rates as term, inflation and foreign exchange risk
premiums have generally been so tiny. Evidence supports this long-standing belief.
 The normal advance premium on settlement due in a few years and after one year is
expected to be lower. Furthermore, the common understanding that upward sloping lending
rates suggest positive term premiums is false, as the upward sloping yield curve can be
attributed to expectations of increased inclusion over the study period.
 Many settlement and due date combinations include insurance periods and premium
payment periods.