Spot Exchange Rate
Spot exchange rate (or FX spot) is the current rate of exchange between two currencies. It is the rate at which the currencies can be exchanged immediately.
According to the definition, delivery is theoretically immediate; however, conventions of currency markets allow for up to two days for settlement of a transaction.
You can even use Google to find spot exchange rates. Just punch in a search query in the Google search bar using the three-letter codes for currencies and it will get you the exchange rate and even the final value of your money in the intended foreign currency. For example, if you want to know the exchange rate between USD (United States Dollar) and GBP (Great Britain Pound) in terms of USD/GBP, you simply write '1 GBP in USD'. Today, 18 June 2012, at 23:10 UTC, it gave me a value of 1.57 USD/GBP. It means it takes 1.57 USD to buy 1 GBP.
Spot exchange rates are presented either as a direct quote or as indirect quote.
Example 1: A US company is required to pay 20 billion Chinese Yuan (CNY) to a Chinese company today, 18 June 2013. How many USD the company has to convert in spot forex market to get the required CNY.
From XE.com, we get that 1 CNY = 0.163152 USD on 18 June 2013, at 23.33 UTC. The rate is based on mid-market quotes.
Since 1 CNY = 0.163152 USD, 20 billion CNY must equal 3.26304 billion USD (0.163152 × 20 billion).
The company must sell 3.26304 billion USD to get 20 billion CNY to pay to the Chinese company.
Example 2: In example 1, we used the mid-market quote to calculate the amount of US dollars needed. In reality, exchange rates are quoted as a range, showing both bid and ask prices.
Current live CNY/USD bid-ask quote obtained at oanda.com are 0.1619 − 0.1623.
The bid price is the price at which the currency dealer is willing to buy CNY; in return of USD. The ask price is the price at which the dealer is willing to sell CNY in return of USD.
The US company has USD and it wants to buy CNY, so it must pay the ask price i.e. 0.1623. In order to buy 20 billion CNY, it has to pay USD 3.246 billion
Written by Obaidullah Jan, ACA, CFA