With numerous factors influencing currency demand day-to-day, staying on top of the latest market movements and fx products can sometimes be tricky. Whether you have a long-term partnership with an overseas supplier, or simply need to complete a one-time exchange, understanding the various fx products available is key to getting the most out of your transfer. With this in mind, here is everything you need to know about spot contracts, from when to use them to the major advantages you should be aware of.
What Is a Spot Contract?
A spot contract is the purchase or sale of foreign currency instantly. In other words, you’ll get an exchange spot rate based on the live market and can then choose whether or not to transact at that point in time. Spot transfers are the simplest, and quickest, way to make an international business payment.
When Should I Use a Spot Contract
As the name might suggest, you’d want to use a spot contract when you need to make a quick business payment “on the spot.” Since spot contracts use the live market to secure a spot exchange rate, no preliminary work is involved. With an international payments provider on hand, It’s as easy as entering your currencies and deciding where to send them.
Though the currency market fluctuates constantly, not all currency pairs experience the same amount of market volatility. This means that if you're consistently sending payments in one currency and don’t see much change in the rate from transfer to transfer, a simple spot contract is likely all you need.
Spot Contract vs. Forward Contract
While spot contracts are typically used for immediate necessities, such as property purchases and deposits, a forward contract is used to lock in a currency rate for the future. Forward contracts are binding for both parties and are typically used when someone anticipates that the rate will increase and negatively affect the transaction at some point in the future.
Say, for example, a UK manufacturing company has a shipment order to the U.S. set for one year from now. The manufacturing company decides to set a forward contract for $15 million for GBP at a future rate of $0.80 per pound with a delivery date six months from now. With this forward contract in place, the UK manufacturing company is now obligated to deliver the $15 million at the specific rate and date set, without taking into account the fluctuating spot price between now and then.
Since the UK manufacturing company in this example didn't need to send immediate funds, the clear choice was to implement a forward contract. By locking in the current exchange rate for future delivery, they were able to avoid the risk of negative currency fluctuations on their payment.
Advantages and Disadvantages of Spot Contracts
As with everything, there are pros and cons to spot contracts, and understanding whether they are right for your business depends on the exact requirements of your payment.
Do you need to make an international payment in a short amount of time? Are you happy with the current exchange rate? If you answered yes to one, or both of these questions, then a spot contract may be the right fx product for you.
Spot contracts allow you to secure the current exchange rate, and make the payment, without setting rate targets, putting down deposits, or waiting for the market to move. Since the payment is conducted immediately, you’re aware of the costs and currency exposure as soon as the market transaction is made.
Book a Spot Contract with Moneycorp in 3 Easy Steps
- Secure a Rate. Simply set up your Moneycorp account and tell us who to pay and in what specific currency. Then, we’ll quote you a rate based on the current live market.
- Send Your Funds. Once you receive your rate, transfer the necessary funds to your Moneycorp account.
- Make Your Payment. When funds are received, we’ll send your payment immediately. It’s that easy!
Still not sure whether a spot contract is right for you? Speak to a member of our dedicated foreign exchange specialist team to see how we can help manage your global payments today.