Understanding the Forex Spot Rate
Posted On July 29, 2022
The forex spot rate is the most commonly quoted price for currency pairs. It is the basis of the most frequent transaction in the forex market, an individual forex trade. This rate is much more widely published than rates for forward exchange contracts (FECs) or forex swaps. The spot forex rate differs from the forward rate in that it prices the value of currencies compared to foreign currencies today, rather than at some time in the future.
In 2019, the global forex spot market had a daily turnover of more than $6.6 trillion, which makes it bigger in nominal terms than both the equity and bond market.1 Rates are established in continuous, real-time published quotes by the small group of large banks that trade the interbank rate. From there, rates are published by forex brokers around the world.
Spot rates do not take into account forex contract delivery. Forex contract delivery is oblique to most retail forex traders, but brokers manage the use of currency futures contracts, which underpin their trading operations. The brokers have to roll those contracts each month or week, and they pass the costs on to their customers.
In this way, forex dealers incur costs managing their risk while providing liquidity to their customers. Most often they use the bid-ask dealing spread and a lower rollover credit (or higher rollover debit, depending on the currency pair you hold and whether you are long or short) to offset those costs.