Understanding Spot Payments

Spot contracts for international payments

If you want to make an international transfer quickly, the easiest way to do it is with a spot contract, also known as a spot trade, spot transaction or spot payment.

Simply put, a spot (Single Payments Options Trading) contract allows you to make an immediate money transfer from your chosen currency to another party in their currency, with an agreed upon price and a specified spot date (the day when the funds are transferred).

If you want to make an FX spot trade, know this: specialist foreign exchange brokers can often give you a far better rate than high street banks, and might even eliminate any commissions or fees that come with the transfer. You can compare different FX brokers and their offerings here.

How do spot contracts work?
When would you use a spot contract?
What are the benefits of spot contracts?
Are there any risks associated with spot contracts?
An example of a spot trade
Who offers spot contracts

How do spot contracts work?

A spot contract allows you to set a specified rate for an international transaction, which is then executed either immediately or within a couple of days. Usually, the money will be transferred to the recipient within 48 hours of the order being placed.

Under a binding agreement (known as a spot contract), funds are sent by the customer in one currency, exchanged at the predetermined rate offered by a broker and agreed by both sides, and then transferred on to the recipient. This rate is the “spot exchange rate” and the date on which the transfer takes place is the “spot date”. In general, the rate for a spot contract is determined by the prevailing market rates for the day,

When would you use a spot contract?

Spot contracts are useful if you need to send money straight away. This could be for a one-off or infrequent transaction, such as sending a large sum of money abroad to purchase property overseas. It could also be the best option for time-sensitive payments, such as sending money abroad to someone in an emergency or paying an urgent invoice.

However, you may not wish to use a spot trade if you want to send a payment at some point in the future or if you are looking to make the same payment on a regular basis (e.g. monthly). This is because currencies fluctuate, and changes in the exchange rate can mean you actually end up paying far more for a transaction than if you had used a currency hedging product, such as a forward contract. We’ve covered more of the risks involved with spot contracts below.

What are the benefits of spot contracts?

When it comes to spot trades, speed is the main benefit. Through your chosen broker, you’ll be able to log onto their website, select the currency being sold and bought, and where it is being sent, and arrange the spot date quickly, with money usually being disbursed within a couple of days.

Many specialist brokers offer considerably better rates than banks charge, meaning you can significantly save money – particularly if you are sending much larger amounts of money.

Specialist currency brokers offer superior spot rates by monitoring the rates of banks and other brokers, allowing the customer to benefit from the most competitive rate. As brokers have lower overheads than the banks, they can pass on these lower rates without substantial fees or commission.

In addition, many brokers allow you to transfer money across a wide number of jurisdictions and currencies, meaning the customer can access more destinations than via a conventional banking institution. You can compare the best providers for your specific needs using the comparison tool on our website.

Are there any risks associated with spot contracts?

Any international currency exchange involves a level of risk. While spot contracts are protected by their nature from exchange rate volatility, as they are executed at a given rate, spot prices themselves are subject to market movements and can often be very volatile.

A spot trade involves a contract, which legally obliges the sending party to deliver funds within a set timeframe. Companies should not enter into such contracts unless they are ready, willing and able to deliver funds in the agreed period (usually two days), and carry legal liability if they fail to perform.

Additionally, for more frequent transactions, businesses may find it more cost-efficient to use other products offered by a currency broker and international payment specialist, so that better rates can be locked in for multiple payments. We’ve explored more of these options in our article on how to manage foreign currency risk.

An example of a spot trade

So what does a spot contract actually look like? Let’s look at an example.

Recently, the US-based Ten-Gallon Hat Company needed to sell a hat-making machine located at one of its factories in Mexico and convert the proceeds of the sale back from Mexican Pesos – MXN to USD.

The company was able to sell the machine for MXN 500,000 and then needed to convert that amount into USD. They were offered an exchange rate of 16.225 by their New York-based bank. However, the company found a specialist broker that offered them an exchange rate of 15.436, which resulted in an additional USD 3,945 on the machine sale.

In short, the company needed to send a one-time overseas payment and knew how much they wanted to send. A spot contract via an FX broker allowed them to reduce their immediate currency risk by locking in a favourable exchange rate.

Who offers spot contracts?

A large number of foreign exchange brokers offer spot contracts, including Currencies Direct, Moneycorp, OFX, TorFX and World First, to name a few.
To see which specialist brokers can help your company, you can conduct a free search on our site using the comparison tool found on our homepage. If you need any assistance, feel free to get in touch with us directly by email or by phone.

For more guides to FX contracts, forward hedging solutions and international payments, read our guides below: