What is the “Spot Exchange Rate”? It is the price of one currency expressed in the price of another currency at any given moment in time – for immediate delivery. For example, how many Japanese Yen can be purchase for one U.S. dollar at this specific moment in time? The answer is relative to the exchange in the foreign exchange market.

Despite the concept of “immediate delivery”, the transaction is not settled immediately; the globally accepted settlement cycle for foreign exchange contracts is two days. Within the foreign exchange market, there are two dates one must note: The “trade date” is the date a spot contract is executed. The “settlement date” is the day on which funds are physically exchanged, per market convention for "spot delivery" (this is the day when the funds will show in the receiver's account). The difference between the trade date and the settlement date in a spot transaction reflects both the need to arrange the transfer of funds and the time difference between currency centers involved.

The demand and supply of a currency in the market determines the pricing of foreign exchange and/or the spot exchange rate. It can be affected by a country's current rate of inflation and expected future inflation rates, the country's balance of payments, the monetary and fiscal policies of the country's government, various economic indicators which create expectations about the country's economic health, differences between foreign and domestic interest rates and central bank interventions.

A foreign exchange rate quotation consists of two currencies: the 'base' (fixed) currency and the 'term' (variable) currency. A quotation shows how many units of the terms currency will equal 1 unit of the base currency. Banks quote the base currency mostly in terms of the Euro, the Pound Sterling or the U.S. Dollar.

Is it a volatile market? Yes…Spot exchange rate movements are highly unpredictable, even during a single trading day. Relying on the spot market for future foreign exchange can be risky as it exposes cash flows to the risk of unfavorable changes in foreign currency values.

Sources:

http://www.economist.com/
http://fisher.osu.edu/fin/fdf/osudata.htm
http://online.wsj.com/home-page