The Spot Rate is the value of one currency in terms of another currency, for example the value of one US dollar in terms of BGN. The spot rates of all currencies quoted in US dollars, are defined as base currency rates, while in all other cases we are talking about cross rates.
A part of the existing currencies are defined as major currencies - those are The US dollar (USD), the Euro(EUR), the British pound (GBP), the Swiss Frank (CHF) and the Japanese Yen (JPY).
In foreign exchange terms by spot date it is understood two business days after the transaction was concluded. This time period is necessary for the preparation of the real conclusion of the transaction - for the preparation of the necessary documents, for the synchronizing of the payments when the countries whose currencies are exchanged are situated in different time zones and so on. The spot date cannot be on a Saturday or Sunday as well as on a day declared, by one of the two countries whose currencies are exchanged, for a public holiday. In such cases, the spot date is set on the first business day following the weekend or the holiday.
It is also possible for the transacting parties to arrange for the conclusion of the transaction on a date prior to the spot date i.e. the same or the next business day. Thus we have "same day value" or "next day value" transactions. Of course, the exchange rate in the "same day value" and "next day value" transactions is different from the spot rate and it reflects the interest rate differential (the difference in the interest rate levels) of the two currencies.
Direct and Indirect Quoting
On the Foreign Exchange markets each country's local currency is quoted in US dollar terms while the rest of the foreign currencies are quoted on one of the two bases - direct or indirect (reciprocal).
- The Direct Quote shows how many units of local currency are necessary to buy one unit of the foreign currency. For example in this way we quote USD/BGN:
2.1600 - 16 USD/ BGN,
which means 2.1600 "we buy" and 2.1616 "we sell" BGN for 1 USD, depending on whether you wish to buy or sell US dollars.
- Inversely, the Indirect or Reciprocal Quote denotes the number of foreign currency units necessary to buy a single unit of the local currency. This type of quote we use to quote the GBP/USD:
1.44 00 - 1.44 10 GBP/USD,
meaning 1.4400 "we buy" and 1.4410 "we sell" USD for 1 GBP if you wish to buy or sell US dollars.
- Quoted and Base currency
The spot rate of exchange is the price of one currency, the so-called base currency, expressed in another currency - the quoted currency. The most widely used base currency is the US dollar. In the example USD/BGN, the base currency is the US dollar, because the "buy" and "sell" quotes are expressed in units of BGN per 1 US dollar. In the case of the indirect quote GBP/USD, the base currency is the British Pound, because the "buy" and "sell" quotes are expressed in units of US dollars per 1 British Pound.
The following scheme shows the different parts of the spot exchange rate: Pips and Basis Points.