- The spot price denotes the current market price that an investor has to pay to acquire financial security.
- The spot price is used in the context of immediate selling and buying of securities, whereas futures prices are used in the context of delivery and payment to a predetermined future date.
- Contango refers to the situation when the spot price is less than futures price while backwardation refers to the situation when spot price becomes higher than the futures price.
What is Spot Price?
The spot price denotes the current market price that an investor has to pay to acquire financial security. Spot price can be used as a synonym for the current market price. The opposite of the spot price is the futures price, which is the price agreed upon today, but payable/receivable on a specified future date.
The price of commodities futures contracts, such as those for oil, wheat, or gold, is most usually compared to spot prices. Because stocks usually trade on the spot price. You exchange stock for cash after buying or selling it at the quoted price.
Difference between the spot price and strike price
The relationship between the spot price and the futures price
The spot price is used in the context of immediate selling and buying of securities, whereas futures prices are used in the context of delivery and payment to a predetermined future date. Generally, the spot price is lower than the futures price. Such a situation is called contango. It is quite usual for non-perishable goods that have high storage costs. When the spot price becomes greater than the futures price, the situation is called backwardation.
Examples of Spot Prices
An asset can often have different futures and spot prices. For instance, gold may have its spot price equal to Rs. 2000, and its futures price equals to Rs. 2300. Similarly, securities may trade in a different price range in the futures market and the stock market. For example, AAPL (Apple Inc.) might be trading at Rs. 450 in the stock market, but it may have a strike price of Rs. 400 in the futures market. The lower futures price as compared to its spot price reflects that traders are having pessimist perceptions about the company in the future.