What Is the Spot Exchange Rate?
A spot exchange rate is the current price level in the market to directly exchange one currency for another for delivery on the earliest possible value date. Cash delivery for spot currency transactions is usually the expected settlement date two business days after the transaction date (T+2).
For most currencies, the spot rate is usually displayed to four decimal places. For certain currencies, such as the Japanese yen, it is only said in two decimal places.
The exchange rate between two currencies is determined by various factors that affect each currency’s value, including interest rates, national economic performance, and inflation.
It is also affected by the price that buyers of the currency are prepared to pay and, in turn, how much sellers are ready to accept. These are called the bid and ask prices.
In the highly liquid FX market, exchange rates tend to be unstable and prone to significant fluctuations.
That volatility might be profitable for speculative investors but detrimental for international companies with business lines in foreign currencies.
Adverse changes in the exchange rate may erode their profit margins to the point of incurring losses.