Spot Markets – Foreign Exchange Tutorials

What are Spot Markets?

The spot markets, also known as the cash market, is a financial market in which financial instruments or commodities are traded for immediate delivery. It contrasts with a futures market in which delivery is due at a later date. A spot market can be:

an organized market
an exchange or
Over-the-counter (OTC)

Spot markets operates with the existence of infrastructure to conduct the transaction. The spot market for most instruments exists primarily on the Internet.

Spot markets are referred to as “liquid markets” or “cash markets” because transactions are instantly and essentially exchanged for the commodity. While it may take time to legally transfer funds between the buyer and the seller, such as T+2 on the stock market and in most currency transactions, all parties agree to trade “right now.”

A non-spot or futures deal is agreeing on a price now, but the distribution and transfer of funds will take place later. Potential deals in contracts that are about to expire are also sometimes referred to as spot trades since the expiring deal means the buyer and seller can immediately swap cash for the underlying asset. It is an important part of the segment market.

Practice Questions

1: What are spot markets in foreign exchange?
A) Markets where currencies are traded for immediate delivery.
B) Markets where currencies are traded for future delivery.
C) Markets where currencies are traded only on weekends.
D) Markets where currencies are traded for options.

2: Which of the following is true about spot markets in foreign exchange?
A) They involve the exchange of currencies for future delivery.
B) They involve the exchange of currencies at a fixed rate.
C) They involve the exchange of currencies for immediate delivery.
D) They involve the exchange of currencies for options.

3: Which of the following is a characteristic of the spot market in foreign exchange?
A) It involves the exchange of currencies at a fixed rate.
B) It involves the exchange of currencies for future delivery.
C) It involves the exchange of currencies for immediate delivery.
D) It involves the exchange of currencies for options.

4: Which of the following is not a participant in the spot market in foreign exchange?
A) Commercial banks
B) Central banks
C) Retail investors
D) Hedge funds

Answers: