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In finance, a spot contract, spot transaction, or simply spot, is a contract of buying or selling a commodity, security or currency for immediate settlement (payment and delivery) on the spot date, which is normally two business days after the trade date. The settlement price (or rate) is called spot price (or spot rate). A spot contract is in contrast with a forward contract or futures contract where contract terms are agreed now but delivery and payment will occur at a future date.

Spot prices and future price expectations

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Depending on the item being traded, spot prices can indicate market expectations of future price movements in different ways. For a security or non-perishable commodity (e.g. silver), the spot price reflects market expectations of future price movements. In theory, the difference in spot and forward prices should be equal to the finance charges, plus any earnings due to the holder of the security, according to the cost of carry model. For example, on a share the difference in price between the spot and forward is usually accounted for almost entirely by any dividends payable in the period minus the interest payable on the purchase price. Any other cost price would yield an arbitrage opportunity and riskless profit (see rational pricing for the arbitrage mechanics).

In contrast, a perishable or soft commodity does not allow this arbitrage – the cost of storage is effectively higher than the expected future price of the commodity. As a result, spot prices will reflect current supply and demand, not future price movements. Spot prices can therefore be quite volatile and move independently from forward prices. According to the unbiased forward hypothesis, the difference between these prices will equal the expected price change of the commodity over the period.

Spot date

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Main article: spot date

In finance, the spot date of a transaction is the normal settlement day when the transaction is done today. This kind of transaction is referred to as a spot transaction or simply spot.

The spot date may be different for different types of financial transactions. In the foreign exchange market, spot is normally two banking days forward for the currency pair traded. A transaction which has settlement after the spot date is called a forward or a forward contract.

Other settlement dates are also possible. Standard settlement dates are calculated from the spot date. For example, a one-month foreign exchange forward settles one month after the spot date. I.e., if today is 1 February, the spot date is 3 February and the one-month date is 3 March (assuming these dates are all business days). For a trade with two dates, such as a foreign exchange swap, the first date is usually taken as the spot date.

Examples

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Bonds and swaps

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A spot rate is the interest rate for a specific maturity, which is to be used for discounting the cash flows which occur at that date. An alternate statement of this: the rate of effective annual growth that equates the present value with the future value.[1] The terminology is consistent with the above, in that the spot rate is related to the forward rate analogously.

A spot rate curve displays these rates over various maturities. Each security class will have its own curve (with the resultant credit spread – e.g. swaps vs government bonds – a function of increased credit risk). A zero rate curve or zero curve is the term structure of the yields-to-maturity of Zero-coupon bonds and maturities. [2]

Note that a spot rate curve is not a curve of bond ytm or swap rates[3] – which in fact are curves of currently trading prices of securities with various maturities (these would be: yield curve, swap curve, cash curve or coupon curve). Spot rates cannot be directly observed, prices can: spot rates are thus estimated from these prices via the bootstrapping method, and the result is the spot rate curve for the securities in question.

Currency

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Main article: Foreign exchange spot

Commodity

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A simple example:[dubious – discuss] even if you know tomatoes are cheap in July and will be expensive in January, you cannot buy them in July and take delivery in January, since they will spoil before you can take advantage of January's high prices. The July price will reflect tomato supply and demand in July. The forward price for January will reflect the market's expectations of supply and demand in January. July tomatoes are effectively a different commodity from January tomatoes (contrast contango and backwardation).

See also

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References

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Revisions and contributorsEdit on WikipediaRead on Wikipedia

Spot contract

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from Grokipedia
A spot contract, also known as a spot transaction, is a binding agreement between two parties to buy or sell an asset—such as a , , or —at the prevailing market , known as the spot price, with settlement and delivery occurring immediately or within a short timeframe, typically one or two s. In commodities trading, this often involves physical delivery of the underlying asset on the next calendar or , distinguishing it from longer-term arrangements. For , spot contracts facilitate the exchange of currencies at the agreed rate for value in two s, serving as the foundational transaction in the global FX market. Spot contracts operate within spot markets, which are venues for immediate exchanges of assets, contrasting with derivatives markets like futures where delivery is deferred to a future date. These markets encompass commodities (e.g., oil or grains), where prices reflect current dynamics, and financial instruments, including equities and bonds traded on exchanges for same-day or next-day settlement. In , spot contracts dominate daily turnover, enabling businesses and investors to immediate currency risks or execute cross-border payments without forward commitments. Unlike futures contracts, spot contracts do not involve margin requirements or daily mark-to-market adjustments, making them simpler but exposing parties directly to current market volatility. The significance of spot contracts lies in their role as mechanisms, providing real-time benchmarks for asset values that influence broader financial systems, including derivatives pricing. They are regulated differently across jurisdictions: in the U.S., the (CFTC) oversees spot commodity markets to prevent and manipulation, while the Securities and Exchange Commission (SEC) addresses spot securities and certain FX transactions. Globally, bodies like the (BIS) monitor spot FX activity, which accounts for a substantial portion of the $9.6 trillion daily FX turnover as of 2025. Spot contracts thus underpin efficient capital flows, trade facilitation, and economic stability by ensuring prompt and transparent pricing.

Definition and Key Concepts

Definition

A spot contract is a financial agreement to buy or sell an asset, such as commodities, securities, or currencies, at the current market with settlement occurring on the spot date, typically within a short period like two business days. The purpose of a spot contract is to enable the immediate transfer of ownership and payment between parties, allowing them to address urgent needs or exploit prevailing market conditions without any commitments to future delivery. The basic mechanics of a spot contract involve the parties reaching an agreement on the trade date regarding the quantity, price—known as the spot price, which is the prevailing market rate—and the specific asset, followed by settlement on the date, the designated timeline for completing the exchange. Spot contracts emerged in early 19th-century trading markets in the United States, particularly in the along major waterways, as a means to facilitate immediate physical deliveries, and evolved with modern financial markets following the that expanded spot trading in currencies and other assets.

Spot Price

The spot price is defined as the current market price at which an asset, such as a , or , can be bought or sold for immediate delivery and payment, directly reflecting the real-time balance of in the market. For example, the spot price of silver is the raw spot (melt) value for pure silver, typically quoted per troy ounce of .999 fine silver for immediate delivery. This price is established through ongoing transactions and represents the prevailing value at the moment of quotation, excluding any deferred settlement terms. Spot prices are determined by a variety of current market conditions, including levels, production rates, and overall supply-demand dynamics, which can shift based on economic indicators like and interest rates. Geopolitical events, such as international conflicts or policy changes, further influence these prices by altering perceptions of supply availability. For non-perishable assets like metals or grains, spot prices briefly incorporate storage and financing costs, as these elements affect the effective supply brought to market by holders. In spot contracts, the spot price functions as the fixed benchmark price agreed upon by the parties, enabling immediate execution of the transaction at that quoted value, whether in organized exchanges or over-the-counter (OTC) markets. This role ensures that the contract settles promptly based on the prevailing market rate, providing a transparent reference for valuation. Spot prices exhibit significant volatility, often fluctuating rapidly in response to or surges in trading volume, as seen in the oil market where prices can swing sharply following OPEC production decisions. For instance, announcements have historically triggered immediate changes in crude oil spot prices, amplifying market uncertainty. The spot price thus serves briefly as an indicator of future price expectations and is used for settlement on the spot date.

Spot Date

The spot date refers to the settlement date in a spot contract, when payment is exchanged and delivery of the underlying asset occurs, typically shortly after the trade date to facilitate near-immediate execution. This timeline usually involves a short lag from the trade date (T), such as T+0 in cash markets for instantaneous settlement or T+2 for most foreign exchange (FX) transactions. The immediacy of the spot date underscores its role in distinguishing spot contracts from forward agreements, which involve extended settlement periods. Standard conventions for determining the spot date vary by market but prioritize business days, excluding weekends and public holidays. In markets, the spot date is conventionally two business days forward from the trade date (T+2), ensuring sufficient time for operational processing while maintaining prompt settlement; exceptions apply for pairs like USD/CAD, where it may be T+1. In commodities trading, spot dates often allow for same-day or very short-term physical delivery, particularly for cash market transactions, though practical logistics may extend this to a few days. Variations in spot date conventions depend on the asset class and jurisdiction. For equities, the U.S. Securities and Exchange Commission (SEC) shortened the standard settlement cycle from T+2 to T+1 effective May 28, 2024, applying to most securities transactions to reduce counterparty risk and enhance efficiency. Bond markets exhibit further diversity; for instance, municipal securities historically settled on a T+3 basis until 2017 when they aligned to T+2, and to T+1 effective May 28, 2024; US government securities have long settled on T+1. The spot date is calculated by adding the applicable settlement cycle to the trade date and adjusting for non-business days using established conventions, such as the Modified Following rule, which shifts the date forward to the next business day unless it falls in the subsequent calendar month, in which case it rolls backward. This method ensures the spot date aligns with operational realities across global markets while adhering to regulatory and customary practices.

Theoretical Foundations

Relation to Future Prices

Spot prices embody the market's collective assessment of an asset's current value, forming a foundational element in financial theory for projecting price trajectories. Under the unbiased expectations hypothesis, current spot prices contribute to the formation of expectations for future spot prices, as prices are posited to serve as unbiased predictors of those future spots, reflecting rational market anticipations absent risk premiums. This linkage underscores how spot prices anchor pricing models, providing a benchmark against which anticipated changes in , , or economic conditions are evaluated. For non-perishable commodities, such as metals or grains that can be stored, the spot price closely approximates the expected future spot price, adjusted for carrying costs like storage and financing. This relationship ensures no- conditions prevail; if the spot price deviates significantly from the discounted expected future spot, traders can exploit the misalignment through strategies like cash-and-carry arbitrage, thereby restoring equilibrium. Such dynamics highlight the spot price's role in stabilizing market expectations over time. In contrast, for perishable goods like seasonal produce or , spot prices are predominantly driven by immediate imbalances, with limited connections to future prices due to inherent storage constraints that prevent long-term holding. Futures markets for these assets are either absent or highly constrained, as perishability undermines the feasibility of and forward planning, rendering spot prices a pure reflection of short-term market pressures rather than extended expectations. Traders routinely monitor spot prices to assess overall , using them as indicators of current bullish or bearish trends in commodities or currencies. Notable deviations between spot prices and futures or expected values can signal emerging bubbles from excessive optimism or impending shortages from supply disruptions, prompting preemptive positioning in markets.

Cost of Carry Model

The cost of carry model provides a foundational theoretical framework for linking the spot price of an asset to its by incorporating the net costs and benefits of holding the asset over the period until delivery. In this model, the is determined as the spot price adjusted for carrying costs, which include financing expenses such as the risk-free , storage and fees, and any opportunity costs, minus benefits like yields or yields derived from possession of the asset. This approach ensures that the reflects the where holding the physical asset is indifferent to entering a , preventing opportunities. The key equation in the cost of carry model for commodities or assets with storage considerations is: F=S×e(r+u−y)TF = S \times e^{(r + u - y)T} where FF is the theoretical forward price, SS is the current spot price, rr is the continuously compounded risk-free interest rate, uu represents the proportional storage costs (including insurance), yy is the convenience yield (the non-monetary benefit of holding the physical asset, such as avoiding supply disruptions), and TT is the time to maturity of the forward contract in years. This equation is derived through a no-arbitrage argument. Consider two strategies at time zero: (1) entering a long forward contract to buy the asset at price FF at time TT, which requires no initial outlay; or (2) buying the asset today at spot price SS, financing the purchase by borrowing SS at the risk-free rate rr, incurring storage costs uu proportional to SS, and benefiting from the convenience yield yy. The total cost of the second strategy at time TT is SerT+S e^{rT} + present value of storage costs adjusted continuously, net of convenience yield, equaling Se(r+u−y)TS e^{(r + u - y)T}. In equilibrium, to eliminate arbitrage, the forward price FF must equal this carried value, assuming continuous compounding and proportional costs. The derivation relies on the law of one price, where identical cash flows must have the same value. For spot contracts, which settle immediately with delivery and payment typically on the spot date (often T+2 for financial assets), carrying costs are negligible because there is no holding period. Nonetheless, the model elucidates why spot prices inherently embed short-term market expectations of carry components, such as imminent shifts or storage pressures, which influence the spot-forward basis and reflect anticipated near-term supply-demand dynamics. The cost of carry model assumes no-arbitrage conditions, perfect capital markets with unlimited borrowing and lending at the , costless storage and transport, constant carrying parameters over time, and the asset's full storability without perishability. These assumptions facilitate the clean exponential relationship but limit applicability in real markets; for instance, the model breaks down for highly perishable assets like fresh produce, where storage costs uu become prohibitive or impossible, or for dividend-paying , requiring an additional yield term qq subtracted from rr to account for income foregone by holding the forward instead of the spot asset. Transaction costs, taxes, market frictions, and variable convenience yields can also cause deviations from the predicted forward price.

Comparison with Derivative Contracts

Versus Forward Contracts

Spot contracts and forward contracts differ fundamentally in their timing and execution. A spot contract involves the immediate exchange of an asset for payment at the prevailing market price, with settlement typically occurring on the spot date, which is usually within one or two business days. In contrast, a is a customized over-the-counter agreement between two parties to buy or sell an asset at a predetermined price on a specific future date, allowing for deferred delivery beyond the immediate term. Pricing mechanisms further distinguish the two. The spot price is determined by current market conditions of at the time of the trade, reflecting the asset's immediate value without adjustments for future factors. The forward price, however, is derived from the spot price plus or minus a cost-of-carry adjustment, which accounts for elements such as interest rates, storage costs, or dividends, resulting in a premium or discount relative to the spot price. Settlement processes highlight additional contrasts. Spot contracts require prompt payment and delivery, minimizing exposure to ongoing market fluctuations but demanding readily available from participants. Forward contracts, by deferring settlement to maturity, enable potential netting of obligations at that time but introduce due to their bilateral nature, with no initial margin or exchange clearing to mitigate default. In terms of applications, spot contracts are primarily suited for transactions requiring immediate access to an asset, such as fulfilling urgent operational needs. Forward contracts, conversely, are employed to against anticipated future price volatility or to speculate on directional movements, providing certainty over future costs or revenues.

Versus Futures Contracts

Spot contracts differ fundamentally from futures contracts in their structure, execution, and purpose. Spot contracts typically involve over-the-counter (OTC) or exchange-based transactions with immediate settlement, where the buyer pays the full upfront and receives delivery of the asset shortly thereafter, often within two business days. In contrast, futures contracts are standardized agreements traded exclusively on regulated exchanges, obligating the parties to buy or sell the underlying asset at a predetermined on a specified future date, with physical delivery rare as most positions are offset before expiration. This in futures includes fixed contract sizes, quality specifications, and delivery locations, facilitating high liquidity and anonymous trading through the exchange, whereas spot contracts are often customized to the parties' needs without such uniformity. In terms of pricing and trading mechanics, spot prices reflect the current and update continuously, enabling instant execution at the prevailing rate without leverage. Futures prices, however, incorporate expectations of future spot prices and converge to the spot price at contract expiration, allowing traders to use margin accounts—typically 2-10% of the contract value—for leveraged positions that amplify both gains and losses. Trading in futures occurs via electronic platforms on exchanges like the , with continuous quoting and high volume, while spot trading may happen bilaterally or on less formalized venues, lacking the same depth of market integration. Risk management features further distinguish the two. Spot contracts expose participants to full at the outset, as payment and delivery occur immediately without intermediaries, potentially leading to default if one party fails to perform. Futures mitigate this through a central clearinghouse that acts as the buyer to every seller and seller to every buyer, guaranteeing performance, while daily marking-to-market adjusts margin accounts to reflect unrealized gains or losses, preventing the buildup of large deficits. Variation margins in futures ensure ongoing , contrasting with the one-time exposure in spot transactions. Regulatory oversight also varies significantly. Spot markets are often lightly regulated or unregulated, relying on general commercial laws without mandatory reporting or limits on positions, though certain spot transactions like may fall under banking oversight. Futures contracts, designated as such under the Commodity Exchange Act, are subject to stringent supervision by the U.S. (CFTC), including position limits to prevent , daily reporting requirements, and enforcement of exchange rules. The SEC provides additional oversight for security futures products, ensuring transparency and investor protection across these exchange-traded instruments.

Market Applications

In Foreign Exchange

In the (FX) market, spot contracts are primarily traded over-the-counter (OTC) through electronic platforms such as (formerly ) and EBS, facilitating anonymous and efficient execution among banks, institutions, and brokers. Common currency pairs include , which represents the against the , and GBP/USD for the British pound against the . The standard settlement date for most FX spot trades is T+2, meaning two business days after the trade date, to allow for operational processing; however, pairs involving USD/CAD settle on T+1 due to the proximity of and the time zones, and dates adjust for holidays in the relevant currencies. FX spot trading dominates immediate transactions, accounting for approximately 31% of the global FX market's average daily turnover of $9.6 trillion in April 2025, equating to about $3 trillion per day. These contracts serve purposes such as immediate conversions for payments or speculative positions based on short-term movements. Quotes in the FX spot market follow specific conventions: prices are expressed as bid-ask spreads, where the bid is the price at which a dealer buys the base and the ask is the price at which they sell it, with the spread reflecting and market conditions. Direct quoting expresses the domestic per unit of foreign (e.g., USD per EUR for US traders), while indirect quoting reverses this (e.g., EUR per USD). Settlement occurs through the Continuous Linked Settlement (CLS) , a multilateral netting platform that reduces and by simultaneously exchanging currencies across 18 major pairs, processing over 1 million instructions daily. For example, if a trader buys GBP 1 million at a spot rate of 1.30 USD/GBP, the transaction settles two business days later, with the buyer delivering $1.3 million and receiving the equivalent GBP via CLS, enabling near-immediate access to the foreign currency for hedging or conversion needs.

In Commodities

Spot contracts in commodities primarily involve the immediate purchase and sale of physical goods such as metals, energy products, and agricultural items, with trading occurring on organized exchanges like the London Metal Exchange (LME) or over-the-counter (OTC) markets. These contracts are priced based on assessments from established indices, such as those provided by Platts, which reflect real-time conditions for commodities like oil, metals, and grains. Delivery under commodity spot contracts emphasizes immediacy, often within the same day or within two business days, though logistical constraints vary by asset type. For non-perishables like , physical handover can occur via pipelines or tankers for prompt transfer, while metals such as or aluminum may involve warehouse delivery; however, many spot trades opt for settlement to avoid handling complexities. In agriculture, perishables like or soybeans typically feature same-day spot pricing and delivery at local markets or elevators to minimize spoilage risks. Commodity spot prices are highly sensitive to external factors, including patterns that affect yields and geopolitical events that disrupt supply chains. For instance, the 2022 Russia-Ukraine war significantly elevated spot prices by limiting exports from major producers, contributing to a nearly 110% rise in global wheat values over the prior 18 months due to reduced shipments. These dynamics often manifest in market structures like , where spot prices lag futures due to storage costs, or backwardation, signaling tight immediate supply relative to future expectations in storable goods. A representative example of a spot is the purchase of at approximately $1,800 per for immediate delivery from a certified vault, as seen in mid-2022 market conditions when spot prices hovered around that level amid economic uncertainty. This transaction would typically settle in or via physical transfer, underscoring the flexibility of spot mechanisms in precious metals trading.

In Fixed Income (Bonds and Swaps)

In the markets, spot contracts for bonds involve trades executed for immediate settlement, typically on a T+1 basis for U.S. securities as of 2024, though some corporate or international bonds may settle on T+2 or T+3 depending on market conventions. These spot trades allow investors to acquire or sell bonds at the prevailing market , reflecting current yield levels without deferred delivery. Spot rates derived from these markets represent the zero-coupon yields on default-risk-free bonds, serving as the theoretical discount rates for valuing future cash flows in bond and portfolio . The spot rate curve is constructed through bootstrapping, a process that iteratively derives zero-coupon rates from observed par yields of coupon-bearing bonds, starting from the shortest maturities and solving for longer-term rates. For U.S. Treasuries, this often incorporates prices of Separate Trading of Registered Interest and Principal of Securities (STRIPS), which are zero-coupon instruments created by stripping coupons from Treasury bonds, providing direct market data for spot rates across maturities. This methodology ensures the spot curve accurately reflects the term structure of interest rates, enabling precise discounting of bond cash flows without reinvestment assumptions. In the swaps market, spot-starting interest rate swaps are contracts that become effective shortly after the trade date, typically settling within a few business days, and exchange fixed-rate payments for floating-rate payments based on a notional principal. The fixed leg of these swaps is benchmarked against the prevailing swap rate, which is closely tied to the spot rate curve for valuation purposes, ensuring the of both legs is equal at . These instruments are widely used for interest rate hedging, allowing entities to manage exposure to fluctuations in benchmark rates like by converting fixed obligations to floating or vice versa. For example, an investor might trade a 10-year U.S. Treasury bond on the spot market at a yield of approximately 4%, with settlement occurring the next , enabling immediate positioning in the current environment.

Advantages and Risks

Advantages

Spot contracts provide immediacy in transactions, enabling buyers and sellers to exchange assets at the current market with settlement typically occurring within one or two s (T+1 or T+2). This feature is particularly beneficial for urgent needs, such as importers requiring immediate access to foreign currency to fulfill payment obligations for goods. Unlike forward contracts, which involve deferred settlement, spot contracts allow for prompt delivery and payment, minimizing exposure to interim market fluctuations. High is a key advantage of spot markets, especially in and major commodities, where substantial trading volumes ensure narrow bid-ask spreads and rapid price adjustments based on real-time participation from diverse market actors. This facilitates efficient execution of large trades without significant price impact, making spot contracts attractive for both retail and institutional participants seeking quick market entry or exit. The simplicity of spot contracts stems from their straightforward structure, involving a direct cash-for-asset exchange without the requirements for margin calls, collateral posting, or contract rollovers associated with . This reduces operational complexity and administrative burdens, particularly for short-term trades where participants aim to avoid ongoing management of future obligations. Spot contracts contribute to effective by establishing transparent, prevailing prices through immediate interactions, serving as real-time benchmarks that influence pricing and signal broader economic conditions. These prices are publicly known and accessible, promoting market efficiency and informed across sectors.

Risks

Spot contracts expose participants to due to potential price volatility between the trade execution and the spot settlement date, typically spanning one to two business days. This directional arises from adverse movements in the underlying asset's spot price, such as intraday swings in commodities markets where rapid fluctuations can lead to unanticipated losses before delivery. For instance, in or agricultural spot trading, sudden supply disruptions or shifts can amplify this exposure, making it the primary in physical or spot transactions. Settlement risk, also known as Herstatt risk, occurs when one party delivers the currency or asset but fails to receive the counterpart due to the counterparty's default, insolvency, or operational failure, potentially resulting in the full principal amount at risk. This risk is particularly prominent in spot transactions, where time zone differences and non-simultaneous settlements across currencies can extend exposure to one or two business days, with historical examples including the 1974 collapse of Bankhaus Herstatt, which caused losses estimated at $200 million for unsettled trades. Basic mitigation involves payment-versus-payment (PVP) mechanisms like Continuous Linked Settlement (CLS), which settles trades simultaneously across currencies, reducing principal risk for about 70% of global turnover as of April 2022, though approximately 31% of global market turnover settled without any form of mitigation as of April 2022. The 2024 implementation of T+1 settlement for securities in the US and has prompted adjustments in spot practices to align cycles, potentially amplifying operational challenges. Operational risk in spot contracts stems from errors in trade execution, confirmation, or processing, as well as delays from holiday adjustments that alter standard settlement dates and create mismatches between expected and actual value dates. For example, in FX spot trading, manual entry errors or delayed trade capture can lead to incorrect positions, profit-and-loss miscalculations, or failed settlements, while unadjusted holidays may shift the T+2 spot date, increasing exposure periods. Mitigation strategies include straight-through processing (STP) to automate trade flows from front to back office, timely trade entry, and daily reconciliations to detect discrepancies early. Liquidity risk arises in spot markets when low trading volume or market stress results in wide bid-ask spreads or difficulty exiting positions quickly, leading to unfavorable pricing or execution failures. In illiquid spot segments, such as certain commodity markets or emerging pairs, participants may face amplified costs during volatile periods, as evidenced by increased spreads in spot markets amid pressures. Basic includes trading in more venues or using netting agreements to reduce overall exposure, though spot's immediate limits hedging options compared to .

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