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What is the Difference Between a Forward Rate and a Spot Rate?

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What is the Difference Between a Forward Rate and a Spot Rate?
posted Jul 10, 2017 by Ananya Saha

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The forward rate and spot rate are different prices, or quotes, for different contracts. The forward rate is the settlement price of a forward contract, while the spot rate is the settlement price of a spot contract.

A spot contract is a contract that involves the purchase or sale of a commodity, security, or currency for immediate delivery and payment on the spot date, which is normally two business days after the trade date. The spot rate, or spot price, is the current price of the asset quoted for the immediate settlement of the spot contract. For example, say it's the month of August and a wholesale company wanted immediate delivery of orange juice, it will pay the spot price to the seller and have orange juice delivered within 2 days. However, if the company needs orange juice to be available at its stores in late December, but believes the commodity will be more expensive during this winter period due to a higher demand than supply, it cannot make a spot purchase for this commodity since the risk of spoilage is high. Since the commodity wouldn't be needed until December, a forward contract is a better fit for the investment.

answer Jul 11, 2017 by Tanmay
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