- 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.
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 $1000, and its futures price equals to $1300. 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 $250 in the stock market, but it may have a strike price of $200 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.