Differentiate between a spot contract and a forward contract.

Expert Solution

SPOT CONTRACT:

* A spot contract, spot transaction or simply spot, is a contract of buying or selling a commodity, security or currency for settlement(payment and delivery) on the spot date, which is normally two business days after the trade date.

* The settlement price or rate is called spot price(or) spot rate.

*it is contrast with a forward contract or future contract where contract terms are agreed now but delivery and payment will occur at a future date.

FORWARD CONTRACT:

*A forward contract or future contract involves an agreement of contract terms on the current date with the delivery and payment at a specified future date.

* In contrast with spot contract, A forward rate is used to quote a financial transaction that takes place on a future date and is the settlement price of a forward contract.

* Forward rates are calculated from the spot rate and are adjusted for the cost of carry to determine the future interest rate that equates the total return of a longer-term investment with a strategy of rolling over a shorter-term investment.

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Rahul Sunny answered 1 year ago

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