Spot rates are the current exchange rates at which specific currencies can be bought or sold on currency exchange markets. Spot rates fluctuate by the second. At OFX, a single transfer may also be called a ‘spot deal’. All that means is that you have confirmed your transfer at a certain exchange rate.
What is a spot rate in foreign exchange?
Spot rates are the current exchange rates at which specific currencies can be bought or sold on currency exchange markets. In plain English, they are the “right now” rate for any given currency. If you choose to make an exchange immediately, your chosen currencies will be exchanged at the current spot rate.
Foreign exchanges executed under the spot rate must be delivered within two business days. They are no-nonsense, simple transactions, and most currency exchanges are executed at the spot rate.
Spot rates are beneficial because they take the guesswork out of currency exchange, and allow for a bit more operational security in the short term. If you are absolutely positive you are comfortable with the spot rate, you can proceed with your transaction immediately with confidence. This is great for people who want to pay for foreign goods, pay foreign contractors, or need and can afford last-second currency exchanges. Running up against a deadline for that invoice? Go ahead and send it at the spot rate; you know what you’re getting.
Spot rates and forward rates
But what if you aren’t comfortable with exchanging currencies immediately? Perhaps you have a lucrative deal on the horizon in India, but you aren’t ready to make a payment yet, and you’re concerned the exchange rate will only get worse later in the season? Then forward rates may be perfect for you.
Forward rates allow you to lock-in the current exchange rate for a transaction to be completed at an agreed-upon later date. These contracts are binding, but they can be massively advantageous to certain customers.
Take the India deal mentioned above. There are uncontrollable factors that may affect your exchange rate such as:
- seasonal weather
- political instability
- market trends
Any number of variables could cause the exchange rate to be more costly at the time you’re ready to actually send the money. With a Forward Contact, you can guarantee an exchange rate now for use even at a later date. At OFX, we offer forwards from two days to twelve months in advance.
* * *Forward Contracts can help protect against currency fluctuations, but they can have some downsides. Talk to your OFXpert about what could work for you.