Spot
Currency spot trading is one of the most popular foreign currency instruments in the world.
A Spot deal consists of a bilateral contract whereby a party delivers a specified amount of a given currency against receipt of a specified amount of another currency from a counter-party, based on an agreed upon exchange rate, within two business days of the deal date.
The exception is the Canadian dollar, in which the spot delivery is executed next business day. The two-day spot delivery for currencies was developed long before technological breakthroughs in information processing. This time period was the minimum time frame necessary to check out all transactions’ details among counter-parties.
Although technologically feasible, the contemporary marketplace does not find it necessary to reduce the time to make payments. Human error still may occur and the extra day provides for this potential scenario.
By the entering into a contract on the spot market, a trading bank serving the trader tells the latter the “quota” – an evaluation of the currency traded against the U.S. dollar or some other currency.
A quota consists of two figures (for example, USD/JPY = 33.27/133.32 or, which is the same, USD/JPY = 133.27/32). The first from these figures (the left part) is called the “bid” – price (that is a price at which the trader sells), the second (the right part) is called the “ask” – price (the price at which the trader buys the currency).
The difference between the “ask and bid price” is called the “spread”. The spread is measured in points or what is referred to as “pips”.
In terms of volume, currencies around the world are traded mostly against the U.S. dollar, because the U.S. dollar is the currency of reference. The other major currencies are the euro, followed by the Japanese yen, the British pound, and the Swiss franc. Other currencies with significant spot market shares are the Canadian dollar and the Australian dollar. In addition, a significant share of trading takes place in the currencies crosses, a non-dollar instrument whereby foreign currencies are quoted against other foreign currencies, such as euro against Japanese yen.
