Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Cash Price

What it is:

Also called the spot price or the current price, a cash price is the current price of a commodity if it were to be sold or purchased today.

How it works (Example):

For example, if you purchase a cup of coffee in a restaurant, you pay the cash price -- the price of the good for immediate delivery.

Why it Matters:

There is an important link between cash prices and futures prices for commodities, and the difference between the two -- that is, the difference between the price of coffee now and the price for delivery of coffee in, say, three months -- is called the basis. This time spread can be an economically important variable because it indicates the market's expectations about futures prices. For example, if people believe that coffee will sell for $40 a pound in three months, the price of a futures contract for delivery of coffee in three months cannot be $100; it will be more like $40, though the price for storing the coffee helps determine the relationships between futures prices and cash prices. In any case, futures prices for a given commodity generally converge toward the cash price as the delivery month of the futures contract approaches.

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