Spot rate

Definition

The spot rate is the current exchange rate at which a currency can be bought or sold for immediate delivery. It reflects the value of one currency in terms of another at a specific point in time.

5 Must Know Facts For Your Next Test

1. Spot rates fluctuate constantly due to changes in supply and demand in the forex market.
2. They are used as a basis for determining forward rates, which are future exchange rates agreed upon today.
3. Financial managers use spot rates to assess the current cost of international transactions and manage exchange rate risk.
4. Spot rates are typically quoted for major currencies such as USD, EUR, JPY, and GBP.
5. The difference between the spot rate and forward rate can indicate market expectations about future currency movements.

Review Questions

• What factors influence the fluctuation of spot rates in the foreign exchange market?
• How do financial managers utilize spot rates in their risk management strategies?
• Why might there be a difference between a currency's spot rate and its forward rate?

Related terms

Forward Rate: The agreed-upon exchange rate for a currency pair to be exchanged at a future date.

Exchange Rate Risk:

The potential for financial loss due to fluctuations in the exchange rate.

Currency Hedging: A strategy used by investors and businesses to protect against losses from fluctuating exchange rates.