Spot Transactions

Heading overseas on business? If you pop into the bank today and exchange CDN $1,000 for USD $885 based on the current exchange rate, you’ve conducted a simple spot transaction: the exchange of one currency for another at the prevailing exchange rate.

However, that’s an overly simplified example. Let’s take an example from the business world. Suppose you are a local manufacturer who needs to make a payment in US dollars to an American supplier to pay for machinery you purchased in Seattle, WA. You need to pay the supplier right away to avoid delays. You would book a spot transaction and complete the payment for the exchange at the current market rate, then transfer the US dollars to the supplier. The payment might take a day or two to process, but it’s still considered a spot transaction if the trade settles at the current market rate (meaning the rate that was available when you arranged the transaction).

In another example, you own a bookstore that brings in rare books in foreign languages from overseas. You’ve ordered an unusually large shipment of books from a Swiss publisher this month for an upcoming book fair, and you need to wire the additional funds to the publisher quickly. You book a spot transaction. The exchange is made at today’s rate, and the money is sent to your supplier within two business days.

Strictly speaking, a spot transaction is one that is processed more or less “on the spot” and settles within two business days of the trade date. If it takes longer, it becomes one of several variations of a forward transaction.

In currency transactions, the trade date is the date on which you arrange the transaction. The value date is the date on which the payment for the transaction settles.