The price at which an asset is available for purchase or sale with immediate delivery against immediate payment in a specific market is called the spot price. The term is derived from the fact that such transactions take place ‘on the spot’. In common parlance, for purchase of general commodities, it is referred to as ‘cash on delivery’.
Use of the term
The term spot price is most often used to clearly distinguish it from the futures or forward price. The futures or forward price is the cost of purchasing the asset at a future date.
Price Variation
This price is usually volatile because it is highly susceptible to the forces of demand and supply. The futures price affords an opportunity to buyers and sellers to freeze the price of a transaction as on an agreed future date. But, that price is decided taking account of the current price of the asset and the buyer’s / seller’s expectation of the direction in which the price will move during the period upto the future date. The futures price is thus derived from the spot price which is why these instruments are called derivatives. Options pricing also uses the spot price as a base related to which spreads are fixed.
