What is a Spot Contract?
A spot contract is the most commonly used and basic form of foreign currency exchange. Think of it as a ‘buy now, pay now option’. It is available to any business or individual who have the need to complete a foreign currency exchange transaction. The term ‘Spot exchange rate’ refers to the live market exchange rate available at the time of the transaction, and being able to complete the exchange on the spot – almost. With a spot contract, you will be given 3 options on what day you complete the agreed payment amount to your currency broker. Option 1 – Same day. Option 2 – Next (working) day, 3rd option – two (working) days from the contract is agreed with your currency broker.
So, when entering a spot contract your account manager will also ask you when you will be able to make the payment to us by, and then book accordingly so you are given the sufficient time to get the currency due to us by.
This date will be highlighted in the written spot contract as the ‘Settlement date.’It is also important to remember the currency you are buying, i.e. euros will not be available until the settlement date agreed. Therefore, if you have set up a spot contract with payment due in 2 working days, however we receive your currency payment i.e. pounds, the same day or next working, we will not have the euros available to transfers until the 2nd working day, as stated as the settlement day on the contract.
When Would You Use a Spot Contract?
Spot trading is used in cases when you want/need to complete the transaction immediately or within 2 workings days, and most importantly when you have all the funds available to complete the transfer. If not, then we can look at options like a Forward contract, where completion of the payment can be made up to 18 months later.
If you need to receive the currency you are buying straightaway and have access to funds to complete the exchange in your bank account then a spot contract will be the right choice for you.
It is important to note when entering a spot contract with your currency broker, you are entering into a legal binding agreement, with you making the commitment and obligation to make and complete the agreed payment amount to the currency broker, with the payment arriving by the settlement date noted on the contract note. The only method of payment accepted is a bank transfer or international bank transfer if sending from an overseas bank account. Cheques, cash or card payments are not accepted forms of payment.
Once your payment has been received in full, and on or after the settlement date, the currency broker will then be able to complete the transfer and delivery of the currency you have purchased to the beneficiary bank account you have requested. Most payments will clear the same day or next working day, but this can vary depending on the currency being sent and/or the country the bank resides in.
Your currency trader will inform you of the estimated arrival of your currency at the time of setting up the spot contract. A payment confirmation bank document will also be sent to you by email confirming the completion of the payment transaction and estimated arrival date. For help with cost-effective international money transfers, contact Escape Currencies