SPOT MARKET

MEANING
A spot market is a financial market where financial instruments and commodities
are traded for instantaneous delivery.
Delivery refers to the physical exchange of a financial instrument or commodity with
a cash consideration.
The spot market is also known as the cash market or physical market because cash
payments are processed immediately, and there is a physical exchange of assets.
In a spot market, delivery and cash payment normally take
place on the spot. However, in most organized markets,
settlement – which is the transfer of cash and physical
delivery of the instrument or commodity – normally takes
2 working days (i.e., T+2). Despite the T+2 settlement date,
the contract between the buyer and seller is performed on
the spot at the prevailing price and existing quantity.
 EXAMPLE
An example of a spot market trade is when an
investor (Mr. Jones) wants to buy 1,000 IBM shares
on the New York Stock Exchange (NYSE). He will
contact his broker to buy the shares at the prevailing
market price, say $117.60. The transfer of funds is
completed immediately by the broker to the seller at
a consideration of $117,600. Ownership of the
shares is transferred to Mr. Jones as soon as the
funds clear and are received by the seller.
Assets Traded on Spot Markets

EQUITY BONDS TREASURY

BILLS

COMMODITIES
FOREIGN
(AGRICULTURE,
EXCHANGE LIVESTOCK,etc)
CHARACTERISTICS
•Transactions are settled at the ruling price known as
the spot price or spot rate.
•Delivery of the asset takes place immediately or
otherwise at T+2.
•Transfer of funds is instantaneous; otherwise,
settlement can be at T+2.
Trading Mechanism

The price on the spot market is the going

price for a trade executed on the spot and
is known as the spot price or the spot
rate. Price is determined by buyers and
sellers through an economic process
of supply and demand.
 TYPES OF SPOT
MARKET

ORGANISED
OVER THE
STOCK
COUNTER
EXCHANGE
 ORGANISED STOCK EXCHANGE
It is a market place that is properly organized for
trading securities under the supervision of an
established stock exchange.
 OVER THE COUNTER
It is a decentralized market in which market
participants trade stocks, commodities,
currencies or instruments directly between
parties and without a central exchange or
broker.
 SPOT EXCHANGE RATE
It is the current exchange rate between two currencies.
It is determined by the market forces of demand and supply.
At this rate, immediate delivery of foreign currency has to be made.
Generally, there is a two days time lag for spot purchase and sale of the actual delivery.
Exchange rate change continuously in a free market.
The primary dealers quote two way prices and are ready to deal on either side.
INR/USD 78.50 bid/ 78.75 ask.
Bid= Buying and Ask= Selling
Difference between bid and ask= SPREAD.
TOD AND TOM TRANSACTION
TOD- today transaction means currency exchange will
be done on the same day.
TOM- tomorrow transaction means exchange of
currency will take place on the next working day.
TYPES OF QUOTATION
There are two types of quotation-
❖Direct Quotation and
❖Indirect quotation
Direct Quotation-(American terms)- Here quotation are expressed for one unit of foreign
currency to home currency rate.
Eg: 1$=Rs 76
Indirect Quotation-(European terms)- Here quotation are expressed in terms of number of units
of foreign currency for one unit of domestic currency.
Eg: 1Rs=0.013$
DETERMINATION OF EXCHANGE RATE IN
SPOT MARKET
THANKYOU