Spot Exchange Rate (FX Spot)
A foreign exchange spot transaction, also known as FX spot, is an agreement between two parties to buy one currency against selling another currency at an agreed price for settlement on the spot date.
It’s the way foreign exchange rates are expressed as the foreign currency per unit of the domestic currency or vice versa, enabling investors to equate the price of a good or a service in a common currency.
Usually, spot transactions in the interbank market involve large transactions, whose bank settlement takes place on the second following business day. Furthermore, spot transactions account for 43% of the total foreign exchange transactions.
Thus, the foreign exchange spot market is prone to fluctuations and high volatility, especially in the short-term. As speculators often create noise around a currency, they affect the exchange rate. In cases that the foreign exchange spot market fluctuates sharply, the government sometimes intervenes to adjust interest rates or to make transactions in the domestic currency, so their country isn’t put in a trading disadvantage with other countries. Sometimes this is referred to as currency manipulation.