A foreign exchange spot contract, or FX spot, is an agreement to exchange specified amounts of two currencies at an agreed rate for near-term settlement under the relevant market convention. It turns a currency quote into payment obligations: a company buying euros must deliver the agreed dollars, and its counterparty must deliver the euros.
For a quant, the trade record needs more than a price. Currency direction, both amounts and the settlement date determine the cash flows. A correct exchange-rate calculation attached to the wrong date can still leave a payment unfunded.
One agreement, two currency legs
Consider a fictional spot trade. On trade date , a client agrees with a dealer to buy EUR 100 at 1.20 USD per EUR. They explicitly agree on a near-term settlement date, labelled . These labels do not specify an actual EUR/USD settlement calendar or business-day lag. Assume no fees, collateral or interim payments.
In the market pair notation EUR/USD, EUR is the base currency. The dimensional price is USD per EUR. The dollar payment follows by multiplying:
At settlement, the parties' cash flows are:
| Party | EUR cash flow | USD cash flow |
|---|---|---|
| Client buying euros | +100 | −120 |
| Dealer selling euros | −100 | +120 |
The currency columns balance separately. Adding EUR 100 to USD −120 would mix units; it would not calculate a profit. Likewise, the USD 120 payment is the consideration for the euros, not a trading loss.
Original synthetic agreement and settlement ledger. The interval is schematic, with no actual currency-pair calendar assumption. Arrows show payment obligations and do not guarantee simultaneous or conditional settlement.
The 1.20 rate is the accepted transaction price. A dealer's bid-ask spread matters when obtaining that price: a client buying the base currency ordinarily trades at the dealer's ask. An indicative midpoint alone does not establish the executable price for the client's size and relationship.
The trade date is not the value date
The trade date records when the parties agree the transaction. The FX value date records when the currencies are due to be delivered. “Spot” does not promise instant account credit or one universal settlement lag.
The distinction is visible in NAB's FX spot description: it describes exchange in two business days and also covers same-day and value-tomorrow payments. Those are product descriptions, not a substitute for checking a particular pair's convention, relevant banking calendars and the actual agreed date. NAB's transaction FAQ also places the settlement date in the trade confirmation.
Once the example trade is agreed, a later market-rate change does not rewrite EUR 100 and USD 120 into different contractual amounts. Cancelling or replacing a trade can involve a new transaction and costs. After delivery, retaining the euros creates currency risk: their value in dollars can change even though the original exchange has completed.
Fixing the price does not secure delivery
An agreed exchange rate removes uncertainty about this contract's conversion price, provided the parties perform. It does not eliminate FX settlement risk. A party can pay away its currency and fail to receive the other currency owed.
A payment-versus-payment arrangement makes final payment of one currency conditional on final payment of the other. The BIS explanation of settlement risk distinguishes this protection from merely expecting two payments to arrive. Availability and the settlement arrangement matter; a spot label itself supplies no such guarantee.
A spot contract makes a single near-term exchange. A foreign exchange forward contract fixes a rate for an exchange beyond the relevant spot date, while an FX swap combines an exchange with an agreed reverse exchange at another date. Buying euros spot does not itself arrange a later conversion back to dollars.
For practice reading the quote before booking the trade, the FX lesson in the Finance Primer develops bid-ask conversions and cross rates. The full lesson is available with a free signed-in account.
Sources
- NAB, Buying and selling foreign currency: FX Spot: agreed-rate exchange, payment timing and the obligation to deliver.
- NAB, Financial Market FAQs: Foreign Exchange, “Foreign exchange transaction types” and “Completing a foreign exchange transaction”: trade and settlement dates, confirmation and delivery.
- BIS, FX settlement risk: an unsettled issue (December 2022), “Mechanisms to reduce settlement risk” and footnotes 3–4: principal risk and payment-versus-payment settlement.
- John C. Hull (2018), Options, Futures, and Other Derivatives, 9th ed., Global Edition, §1.3, pp. 28–29, and §5.10, pp. 139–140: spot versus forward agreement, dealer quote sides and explicit currency-price units.