What is the 'Forex Spot Rate'

The forex spot rate is the current exchange rate at which a currency pair can be bought or sold. The spot forex rate differs from the forward rate in that it prices the value of currencies compared to foreign currencies today, rather than at some time in the future. The spot rate in forex currency trading, is the rate that most traders use when trading with an online retail forex broker.

BREAKING DOWN 'Forex Spot Rate'

The forex spot rate is the most common transaction in the forex market, more so than an FX forward and FX swap. The global forex spot market has a daily turnover of more than $5 trillion, which makes it bigger than both the equity and bond market. 

The standard delivery time for a forex spot rate is T+2 days, which is where there is no adjustment for interest rate differentials. Should a counterparty wish to delay delivery, they will have to take out a forward contract. For example, if a EUR/USD trade is executed at 1.1550, this will be the rate at which the currencies are exchanged on the spot date. However, say European interest rates are lower than they are in the U.S. this rate will be adjusted higher to account for this difference. So if a counterparty wishes to own EUR and short USD for a period of time it will cost them more than the spot rate.

A handful of currencies have shorter spot days, such as USD/CAD and USD/TRY. 

Although the forex spot rate calls for delivery within two days, this rarely occurs in the trading community. Traders that hold a position for longer than two days will have their trades "reset" by the broker, i.e. closed and reopened at the same price, just prior to the two-day deadline. However, when these currencies are rolled there will be a premium or discount attached, depending on the difference in interest rates, via the short term FX swap.

Because the spot rate is the rate of delivery with no adjustment for interest rate differential, it is the rate quoted in the retail market. The retail forex market is dominated by travelers who wish to buy and sell foreign currency whether it through their bank or a currency exchange. 

 

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