Spot exchange rate (also known as benchmark rates, straightforward rates, or outright rates) is “the rate of a foreign-exchange contract for immediate delivery.” The rate is the current price that buyers have to pay for the foreign currency. Even though the term “immediate delivery” is used, but the settlement will take about one to two business days. The spot exchange rate provides the shortest time frame in currency trading and it usually represents a direct trade between two currencies. According to the Foundations of Multinational Financial Management textbook, the quotations for the spot exchange rate are printed daily on most of major newspaper. The spot exchange rate is often expressed as the direct quote, which means “the home currency price of a certain quantity of the foreign currency quoted (usually 100 units, but only one unit in the case of the U.S dollars or the pound sterling)” For example, the spot exchange rate for U.S dollar and Hong Kong dollar can be quoted as $0.1778/HK Dollar. When currencies are traded at the spot exchange rate, the transaction costs are always attached. The transaction cost is created by the bid-ask spread, which is “the spread between the bid and ask rate for a currency.” Bid is the price at which the seller will sell and ask is the price at which the seller will buy. The purpose of the bid-ask spread is to reward the intermediates/sellers for the risks that they bear. The percent spread can be calculated as (Ask price – Bid price)/Ask price. Most foreign currency exchange takes place at the spot market due to its short time frame to delivery.

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