Trending October 2023 # How To Calculate The Spot Price With Example # Suggested November 2023 # Top 19 Popular

You are reading the article How To Calculate The Spot Price With Example updated in October 2023 on the website Restaurant12h.com. We hope that the information we have shared is helpful to you. If you find the content interesting and meaningful, please share it with your friends and continue to follow and support us for the latest updates. Suggested November 2023 How To Calculate The Spot Price With Example

Definition of Spot Price

Download Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

Explanation

The SP is the current price of the commodities or assets at which the traders or investors transact. The value of SP depends upon the number of traders seeking to buy and sell it. When there are more buyers than sellers, the spot price gains similarly; if the sellers are more than buyers, the spot price drops. It is usually based on the demand and supply of assets or commodities. The spot price helps in ascertaining the future price of the commodity; if the trader is looking for a commodity that the trader needs in nearby future, but the spot price of it is expected to be lower than its future price, then the trader will purchase it on the spot price.

How to Calculate the Spot Price?

The SP is more economical than a mathematical value as there is no formula to calculate the spot price. Its demand and supply can only calculate the SP. When there is more demand than supply, the value of SP will increase, whereas when the supply is more than the demand, its value declines. In other words, when there are more buyers than sellers, the spot price will increase because of the high demand for the commodity. Similarly, if there are more sellers than buyers, the spot price will decline due to less need for the commodity.

Example

Let us consider that XYZ Company’s share’s SP is $1500. So, buyers have to pay $1500 to get these shares immediately. Buyers can also purchase futures contracts to acquire these shares at the expiry of the agreement. When the buyer receives the shares instantly, the price is known as the SP, and when the buyer purchases a futures contract, the price is known as the future price.

Time

Spot Price (In dollars)

Buyers

1 July 2023, 11 AM 1500 1100 1100

1 July 2023, 11 AM 1520 1400 1000

1 July 2023, 11 AM 1550 1600 900

1 July 2023, 11 AM 1525 1300 1000

1 July 2023, 11 AM 1500 1100 1200

1 July 2023, 11 AM 1485 1000 1500

From the above study, we can say that the market price changes with time and entirely depends upon the number of buyers and sellers. When the buyers are more than the sellers, the SP will rise; when the sellers are more than the buyers, the SP will decline. So, we can say that the SP depends on market participants’ behavior.

The Spot Price in Option

The option’s spot price is the price at which options can be sold and purchased immediately without further delay. The SP means the current market price of its underlying securities or that of options and the price at which buying and selling only options are done, not the underlying securities. They are called the “option’s SP” instead of “spot price.”

Source: Researchgate

Advantages

Ascertainment of the future price: With the help of the SP, the commodity’s future price can be ascertained. If the buyer is getting a commodity at a lower price than is expected in the future, the buyer will purchase it at the spot price.

Helps in getting profit: The SP is usually lower than the future price, so the trader or buyer who purchases it right now would earn a good amount of profit in the future.

Ownership of the commodity: The trader or investor will get ownership of the commodity or security when they pay the SP.

Holding of the commodity: The trader or investor in the SP gets the commodity as soon as they pay the SP, so they have to keep the commodity themselves, which sometimes causes wear and tear, and their value could decline.

Dependency on the buyers and sellers: The SP depends on the buyers and sellers as it will increase when there are more buyers than sellers and decline when the sellers are more than buyers.

Conclusion

The SP of any commodity or security is the price at which one can buy and sell it instantly. Its rise and decline depend upon the number of buyers or sellers in it. It helps investors and analysts ascertain the future prices of the underlying commodities and securities.