|
The spot price or spot rate of a commodity, a security or a currency is the price that is quoted for immediate (spot) settlement (payment and delivery). Spot settlement is normally one or two business days from trade date. This is in contrast with the forward price established in a forward contract or futures contract, where contract terms (price) are set now, but delivery and payment will occur at a future date. The word commodity is a term with distinct meanings in business and in Marxian political economy. ...
Security is a type of transferable interest representing financial value. ...
In economics and business, the price is the assigned numerical monetary value of a good, service or asset. ...
Settlement (of securities) is the process whereby securities or interests in securities are delivered, usually against payment, to fulfill contractual obligations, such as those arising under securities trades. ...
The forward price is the agreed upon price of an asset in a forward contract. ...
A forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time. ...
In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a pre-set price. ...
Spot prices and future price expectations Depending on the item being traded, spot prices can indicate market expectations of future price movements in different ways. For a security or non-perishable commmodity (e.g., gold), the spot price reflects market expectations of future price movements. In theory, the difference in spot and forward prices should be equal to the finance charges, plus any earnings due to the holder of the security, according to the cost of carry model. For example, on a share the difference in price between the spot and forward is usually accounted for almost entirely by any dividends payable in the period minus the interest payable on the purchase price. Any other price would yield an arbitrage opportunity and riskless profit (see rational pricing for the arbitrage mechanics). The cost of carry refers to the lost oppportunity cost of purchasing a particular security rather than an alternative. ...
In finance a share is a unit of account for various financial instruments including stocks, mutual funds, limited partnerships, and REITs. ...
A dividend is the distribution or sharing of parts of profits to a companys shareholders. ...
In economics, arbitrage is the practice of taking advantage of a state of imbalance between two or more markets: a combination of matching deals are struck that exploit the imbalance, the profit being the difference between the market prices. ...
Rational pricing is the assumption in financial economics that asset prices (and hence asset pricing models) will reflect the arbitrage-free price of the asset as any deviation from this price will be arbitraged away. This assumption is useful in pricing fixed income securities, particularly bonds, and is fundamental to...
In contrast, a perishable commodity does not allow this arbitrage - the cost of storage is effectively higher than the expected future price of the commodity. As a result, spot prices will reflect current supply and demand, not future price movements. Spot prices can therefore be quite volatile and move independently from forward prices. According to the unbiased forward hypothesis, the difference between these prices will equal the expected price change of the commodity over the period. The word commodity is a term with distinct meanings in business and in Marxian political economy. ...
A simple example: even if you know tomatoes are cheap in July and will be expensive in January, you can't buy them and take delivery in July, since they will spoil before you can take advantage of January's high prices. The July price will reflect tomato supply and demand in July. The forward price for January will reflect the market's expectations of supply and demand in January. July tomatoes are effectively a different commodity from January tomatoes (contrast contango and backwardation). Contango is a futures market term. ...
Backwardation, sometimes incorrectly referred to as backwardization, is the situation where futures contracts closer to expiration trade at higher prices than those that are far from expiration. ...
See also |
Feeds |
Contact