Forward vs Spot Contracts – Key Differences

Buying vegetables now (Spot) vs Ordering a cake for next week (Forward).

1. Concepts

• Spot Contract: Agreement to buy/sell immediately (Settlement in T+1 or T+2 days).
• Forward Contract: Agreement to buy/sell at a future date (e.g., T+90 days).

2. Comparison Table

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3. Exam Notes: Writing the Answer

Question: "Distinguish between Spot and Forward Exchange contracts." (5 Marks)

Answering Strategy:

1. Time Factor: "Spot = Now, Forward = Future".
2. Pricing: "Forward Price includes Cost of Carry (Interest)".
3. Settlement: Spot is usually T+2. Forward is T+N.

Summary

• Link: Forward Price = Spot Price + Interest Cost. They are mathematically linked.

Quiz Time! 🎯

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