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SPOT PRICE: DEFINITION, SPOT PRICES VS. FUTURES PRICES, EXAMPLES


By
James Chen

Full Bio
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James Chen, CMT is an expert trader, investment adviser, and global market
strategist.

Learn about our editorial policies
Updated January 31, 2021
Reviewed by Julius Mansa

The spot price is the current price in the marketplace at which a given
asset—such as a security, commodity, or currency—can be bought or sold for
immediate delivery. While spot prices are specific to both time and place, in a
global economy the spot price of most securities or commodities tends to be
fairly uniform worldwide when accounting for exchange rates. In contrast to the
spot price, a futures price is an agreed-upon price for future delivery of the
asset. 




BASICS OF SPOT PRICE

Spot prices are most frequently referenced in relation to the price of commodity
futures contracts, such as contracts for oil, wheat, or gold. This is because
stocks always trade at spot. You buy or sell a stock at the quoted price, and
then exchange the stock for cash.



A futures contract price is commonly determined using the spot price of a
commodity, expected changes in supply and demand, the risk-free rate of return
for the holder of the commodity, and the costs of transportation or storage in
relation to the maturity date of the contract. Futures contracts with longer
times to maturity normally entail greater storage costs than contracts with
nearby expiration dates.



Spot prices are in constant flux. While the spot price of a security, commodity,
or currency is important in terms of immediate buy-and-sell transactions, it
perhaps has more importance in regard to the large derivatives markets. Options,
futures contracts, and other derivatives allow buyers and sellers of securities
or commodities to lock in a specific price for a future time when they want to
deliver or take possession of the underlying asset. Through derivatives, buyers
and sellers can partially mitigate the risk posed by constantly fluctuating spot
prices.



Futures contracts also provide an important means for producers of agricultural
commodities to hedge the value of their crops against price fluctuations.




THE RELATIONSHIP BETWEEN SPOT PRICES AND FUTURES PRICES

The difference between spot prices and futures contract prices can
be significant. Futures prices can be in contango or backwardation. Contango is
when futures prices fall to meet the lower spot price. Backwardation is when
futures prices rise to meet the higher spot price. Backwardation tends to favor
net long positions since futures prices will rise to meet the spot price as the
contract get closer to expiry. Contango favors short positions, as the futures
lose value as the contract approaches expiry and converges with the lower spot
price.



Futures markets can move from contango to backwardation, or vice versa, and may
stay in either state for brief or extended periods of time. Looking at both spot
prices and futures prices is beneficial to futures traders. 



 * Spot price is the price traders pay for instant delivery of an asset, such as
   a security or currency. They are in constant flux.
 * Spot prices are used to determine futures prices and are correlated to them.


EXAMPLES OF SPOT PRICES

An asset can have different spot and futures prices. For example, gold may have
a spot price of $1,000 while its futures price may be $1,300. Similarly, the
price for securities may trade in different ranges in the stock market and the
futures market. For example, Apple Inc. (AAPL) may trade at $200 in the stock
market but the strike price on its options may be $150 in the futures market,
reflecting pessimistic trader perceptions of its future.



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Related Terms
Spot Market: Definition, How They Work, and Example
The spot market is where financial instruments, such as commodities, currencies,
and securities, are traded for immediate delivery.
more
Underlying Asset (Derivatives)—Definition, How It Works, Examples
An underlying asset is a financial instrument upon which a derivative's price is
based.
more
Slippage: What It Means in Finance, With Examples
Slippage refers to the discrepancy between the expected price of a trade and the
price at which the trade is executed.
more
What Is Clearing? Definition, How It Works, and Example
Clearing is when an organization acts as an intermediary to reconcile orders
between transacting parties. A clearing bank approves checks for payments.
more
What Is a Central Counterparty Clearing House (CCP) in Trading?
A central counterparty clearing house (CCP) is an organization that exists in
European countries to facilitate derivatives and equities trading.
more
What Is Spot Trading and How Do You Profit? How It Works
A spot trade is the purchase or sale of a foreign currency or commodity for
immediate delivery.
more

Related Articles

Spot Market: Definition, How They Work, and Example



Underlying Asset (Derivatives)—Definition, How It Works, Examples



Slippage: What It Means in Finance, With Examples



What Is Clearing? Definition, How It Works, and Example



What Is a Central Counterparty Clearing House (CCP) in Trading?



10 Steps to Building a Winning Trading Plan

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