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Derivatives
Spot Vs Forward Transaction
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21 October, 2013, 1:59 PM
Every transaction has three components – trading, clearing and settlement. A buyer and seller come together, negotiate and arrive at a price. This is trading. Clearing involves finding out the net outstanding, that is exactly how much of goods and money the two should exchange.
In Spot transaction, the trading, clearing and settlement happens instantaneously, i.e. ‘on the spot’ the buyer and seller both agreed on some price and complete the transaction immediately, buyer paid the amount and seller release the securities, stock instantly.
A forward transaction is a contract by which two parties mutually agreed to settle a trade at a specific future date, for a stated price and quantity. No money changes hands when the contract is signed. The exchange of money and the handing over of stock only happens at the future date as specified in the contract. In an forward contract, the process of trading, clearing and settlement does not happen instantaneously. The trading happens today, but the settlement happens at the end of the specified period. A forward contract is the most basic derivative contract. We call it a derivative because it derives value from the price of the asset underlying the contract.
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