Spot Contracts are the most commonly used foreign exchange products by businesses and individuals looking to make an immediate transfer to buy or sell foreign currency at the current exchange rate.
Foreign exchange brokers use a spot contract for this transaction. Once the two currencies, amount and exchange rate, have been confirmed, a spot contract is drawn up, a binding agreement between the client and the foreign exchange broker.
The spot contract is booked and confirmed with the client (day of trade). The client sends their money by bank transfer to the foreign exchange broker’s holding account. Before it is converted to the new currency and deposited in the beneficiary account (settlement date).
The money will usually be an immediate transfer or completed within 2-3 days, depending upon the currency and country the money is being transferred to.
Benefits of a Spot Contract
Spot contracts allow you to transfer money immediately to another currency if funds are required promptly. It can be beneficial to transfer money if there is a sudden increase in the value of the base currency you are moving from. Alternatively, you anticipate a significant unfavourable fluctuation in either currency due to current or upcoming events.
A foreign exchange broker can arrange a spot contract. Foreign exchange brokers can typically provide better rates than a bank or mobile application that offer international money transfers. They also have a range of other foreign exchange products that can reduce the risk of transferring money at a lower rate than is needed. Reducing the amount of money, you have in the new currency.
If sending money within Europe of a country that uses the SEPA route, your money should arrive in the beneficiary account either the same or the next day.
Disadvantages of a Spot Contract
A spot contract’s disadvantages are more impactful if you or your business is making regular international payment or large transfers. If your foreign exchange transfers exceed more than £50,000, or currency equivalent, it would be more beneficial to target a rate using a forward contract. This target rate would ensure the money was transferred at a favourable rate that you have chosen rather than the current exchange rate. Which may not be in your favour.
Suppose you are using a spot contract to settle an overseas invoice with a 30 to the 90-day settlement date. In that case, you could lose a significant amount of money if you transfer money immediately rather than plan your transfer of funds. This loss is due to fluctuations in currency exchange rates over 30-90 days. Meaning you might have missed a better opportunity to convert your currency if the exchange rate was more favourable to you within the next 90 days.
Uses of a Spot Contract
Spot contracts may be used to purchase a car in another country, pay international tuition fees, purchase a home or goods from an overseas supplier. They would typically be used for higher-value money transfers rather than to transfer €200.
Commission for a Spot Contract
Commissions on spot contracts will vary subject to foreign exchange broker, currencies involved, and the amount transferred. A currency expert will typically apply a margin of between 0.5% to 3% and apply no transfer fees.
Example of Using a Spot Contract
A client sets up an account with a foreign exchange broker to send a deposit for Spanish property. The client needs to send a transfer of €5000 to the Spanish developer immediately to reserve the property.
The exchange rate on offer is GBP/EUR 1.1250, which the client has accepted. The client transfers £4,444 to the foreign exchange broker’s holding account to process the currency transfer. The client provides the Spanish developer’s bank account details, and the €5000 payment is received into their account the next day.
Booking a Spot Contract
Foreign Exchange Broker
A foreign exchange broker will offer you an exchange rate if you agree to the exchange rate. The spot contract can be booked. Upon booking a spot contract, the foreign exchange broker will send you a deal notification and segregated bank account details to receive your funds. Upon receipt of your funds, your base currency will be converted at the pre-agreed rate. The funds are sent to the beneficiary of your choice.
Foreign exchange brokers will usually have a mobile app and online platform to book spot contracts. Clients can arrange the transfer of funds to their holding account and allow you to input beneficiary account details to complete the currency transfer. In some cases, a payment can be made using a debit card up to a certain value depending upon the foreign exchange broker, else a bank transfer is required.
Booking with a Bank
Booking a spot contract with a bank can be slightly slower and a manual process. For larger money transfers you might be required to visit your branch. They will typically provide you with a ‘day rate’, naturally 3-5% less competitive than a foreign exchange broker’s exchange rate.
Some banks will allow you to transfer money and book spot contracts online. These usually are made in the same way as an internal money transfer; accept a rate will have to be approved online, and a transfer fee will be debited. A beneficiary will also typically be for an international bank.
Spot Contract for Business
Businesses that make regular international money transfers will benefit from adopting a foreign exchange strategy for their international payments using a range of foreign exchange contracts.
Spot contracts, forward contracts and market orders are some foreign exchange products that a business will use to make regular international payments. These payments could be to overseas suppliers, settle invoices from international clients or make regular international payroll payments to overseas staff.
Spot contracts allow a business to make an immediate currency transfer which usually is required to purchase materials. A market order contract is used to target an exchange rate in the coming days or weeks rather than make an immediate transfer. This contract can be beneficial if there isn’t a need to make a direct payment.
Spot contracts can be more beneficial as they allow a business to make an immediate transfer to take advantage of a currency fluctuation. A favourable exchange rate may only be available for a few hours.
Spot Contract for Individuals
Spot contracts are often used by individuals that need to make an immediate international transfer. These payments tend to be larger payments for overseas property, international tuition fees, transferring money to emigrate, or overseas investment.
An individual would typically use a spot contract through a foreign exchange broker due to the better rates they can receive than a bank or mobile app. Foreign exchange brokers can also offer advice for client’s specific circumstances. Provide a foreign exchange product that maximises their currency transfer and reduces the risk from currency fluctuations.
Spot Contract vs Forward Contract
Spot contracts and forward contracts are used throughout the financial services sectors and book different contracts. The spot contract is used within the foreign exchange market to secure an exchange rate for a near-immediate delivery. Clients can essentially buy an exchange rate and trade immediately.
A forward contract is slightly different, whereby it is similar to a spot contract except the funds are paid later. Therefore, individuals and businesses can book today’s rate (spot) and hold that rate for up to a year and pay within the agreed timeframe.
