Definition
Spot vs Futures (Commodity)
The spot price is for immediate delivery of a commodity, while the futures price is agreed today for delivery later; the gap reflects storage, financing and convenience costs.
When you buy gold from a jeweller today, you pay the spot price. An MCX gold future quotes a price for delivery next month, differing from spot by the cost of carry (storage, interest, insurance) minus any convenience yield.
The relationship between spot and futures determines whether a commodity is in contango or backwardation. Indian hedgers compare spot and futures to decide whether to buy now and store or lock a future price, while arbitrageurs keep the two aligned.
Related terms
- MCX (Multi Commodity Exchange)MCX is India's largest commodity derivatives exchange, where futures and options on metals, energy and bullion like gold, silver and crude oil are traded.
- Convenience YieldConvenience yield is the implicit benefit of physically holding a commodity rather than a futures contract, such as ensuring supply or meeting unexpected demand.
- Contango / BackwardationContango is when futures prices are higher than spot (upward-sloping curve), and backwardation when they are lower (downward-sloping), reflecting storage costs versus supply tightness.
- Cost of CarryCost of carry is the net cost of holding an asset to a future date, comprising financing cost less any income, and it determines the fair-value difference between a futures price and the underlying spot price.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.