Spot Commodity

On the spot market (also called physical market or cash market) the traders buy or sell commodities for cash at the current (spot) price determined by the characteristics of the supply and the demand of each commodity. A physical delivery is expected to be done immediately or as the case may be within a commodity-specific time period.

Unlike in commodity future markets, there is no cash settlement. The spot price normally means free on board (FOB). Future prices are determined by the spot price of a commodity. Accordingly, spot commodity price P_Spot can also be calculated through the present value of a future contract P_F considering the risk-free rate r, the cost of storage c, the convenience yield y, and time to maturity of the future contract t:

P_Spot = P_F / e^(r+c-y)t

At maturity the price of a commodity future is the same as the spot commodity. During its expiring month, a future, therefore, can also be called spot commodity. Index provider like Commodity Research Bureau, Goldman Sachs, Dow Jones, Standard and Poor’s, Morgan Stanley, Lehman Brothers, Merrill Lynch, and Deutsche Boerse calculate spot indices for single commodities or groups of commodities.

Spot Commodity