What distinguishes spot transactions from forward transactions?

Spot transactions are distinguished from forward transactions primarily by the timing of the exchange. Spot transactions are executed immediately or "on the spot," meaning that the actual transfer of currency or asset takes place right away, typically settled within one or two business days. This immediacy is a key feature that defines spot transactions.

In contrast, forward transactions involve an agreement to exchange currency or assets at a predetermined future date, with the price set at the time of the agreement. This means that while the arrangement is made now, the actual transaction will not occur until a later point in time. This forward pricing mechanism allows parties to hedge against potential fluctuations in market rates, which is a fundamental aspect of forward contracts.

Understanding this distinction is crucial for grasping how different financial instruments are used for trading and hedging purposes in the exchange market. Spot transactions serve immediate needs, while forward transactions are utilized for future planning and risk management.