Glossary
Spot rate
The exchange rate for a near-immediate currency conversion.
The spot rate is the exchange rate quoted for an immediate currency conversion, with settlement typically two business days after the trade (T+2). Spot transactions are the simplest form of FX, used when no future-dated hedging is required.
In practice
How this works for a UK business
The T+2 settlement convention exists because cross-border payments still route through correspondent banking networks that need time to clear, even though the exchange rate itself is agreed instantly at the point of trade. Some currency pairs, particularly those involving currencies with limited convertibility, settle on T+1 or same-day depending on cut-off times and local market holidays in either currency's home jurisdiction.
Spot conversion is the default choice when there is no meaningful gap between deciding to convert and needing the funds — for example, converting a foreign-currency receipt into GBP as soon as it lands, or making an ad hoc one-off payment where no future date is agreed in advance. It is also the reference point from which every forward rate is calculated, since a forward price is simply the spot rate adjusted by the forward points for the relevant period.
Because spot transactions settle so quickly, they carry no forward-points adjustment and no margin call risk over time — the rate agreed at the point of trade is the rate that applies, with no further movement to manage before settlement.
Worked example
Pitfalls
Common mistakes
- Confusing the mid-market spot rate seen on a comparison site with the rate actually available for a live transaction, which includes the provider's spread.
- Using repeated ad hoc spot conversions for a recurring, predictable payment schedule, when a forward contract would fix the cost in advance and remove the guesswork.
- Assuming spot settlement is always same-day; T+2 is the market convention and some currencies settle even more slowly around local holidays.
- Not checking the booked rate against the confirmation received, since the applied rate — not an earlier indicative screen rate — is what determines the final amount.
FAQs
Frequently asked questions
See also
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