This reference workbook details the mathematical frameworks programmed into commercial contracts to calculate floating physical prices using LME Averages, Quotational Periods (QPs), and Physical Premiums.
Kamal ships 500 tons of copper in March. The contract specifies a Quotational Period (QP) of M+1 (Month After Shipment). Therefore, the pricing month is April. The contract calculates the base price by averaging every daily LME Settlement Price during April to smooth out daily volatility.
| Cell | Data Label | Forensic Input Value |
|---|---|---|
| B2 | Shipment Month (M) | March |
| B3 | Pricing Month (M+1) | April |
| B4 | Sum of all April Daily LME Settlement Prices | $191,100 USD |
| B5 | Number of LME Trading Days in April | 21 Days |
LME Base Average Algorithm (Cell B6):
Logic: Total daily prices ($191,100) divided by 21 trading days.
LME Base Price for April: $9,100.00 USD / Ton.
The LME price only covers pure metal sitting in a London warehouse. Kamal had to mine it, process it, and ship it. He adds a negotiated fixed dollar amount to the floating LME base price to lock in his operational profit.
| Cell | Data Label | Forensic Input Value |
|---|---|---|
| C2 | LME Base Price (April Average from Step 1) | $9,100.00 USD |
| C3 | Logistics Cost Recovery | $100.00 USD / Ton |
| C4 | Grade/Purity Markup | $50.00 USD / Ton |
Final Invoice Price Algorithm (Cell C5):
Logic: $9,100 (LME) + $150 (Total Premium) = $9,250.00 USD / Ton.
Kamal is protected. If the LME drops, the base price drops, but his $150 margin for logistics and quality remains completely intact.
Because the M+1 QP means the final price isn't known until the end of April, Kamal issues a Provisional Invoice in March for 90% upfront cash, and a Final Invoice in May to settle the difference.
| Cell | Data Label | Forensic Input Value |
|---|---|---|
| D2 | Total Volume | 500 Tons |
| D3 | Provisional Price (Estimate used in March) | $8,900 / Ton |
| D4 | Provisional Payment Received (90% of Estimate) | $4,005,000 USD |
| D5 | Final Actual Price (April Average + Premium) | $9,250 / Ton |
Final Settlement Balance Algorithm (Cell D6):
Logic: Total Actual Value (500 tons × $9,250 = $4,625,000) MINUS the $4,005,000 already paid provisionally in March.
Final Settlement Wire Due to Kamal: $620,000 USD.
This two-step invoice process solves the cash-flow gap inherent in floating physical pricing.
This reference workbook details the financial models used to calculate the hidden margin arbitrage available to sellers who successfully negotiate CIF Incoterms instead of FOB.
Under FOB (Free on Board), Kamal only pays to get the goods loaded onto the ship. The buyer pays the main ocean freight. Kamal makes a pure commodity margin.
| Cell | Data Label | Forensic Input Value |
|---|---|---|
| E2 | Cargo Volume | 1,000 Tons |
| E3 | Extraction & Loading Cost (FOB Origin) | $8,000 / Ton |
| E4 | Negotiated FOB Sale Price | $8,500 / Ton |
FOB Gross Profit (Cell E5):
Logic: ($8,500 - $8,000) × 1,000 = $500,000 USD. Kamal makes a clean $500k profit, but leaves money on the table.
Kamal pushes for CIF terms. Under CIF, Kamal pays the ocean freight. Because he has a strong relationship with the shipping line, he secures a bulk freight rate of $50/ton. However, in the commercial contract, he charges the buyer $75/ton for freight.
| Cell | Data Label | Forensic Input Value |
|---|---|---|
| F2 | Cargo Volume | 1,000 Tons |
| F3 | Actual Bulk Freight Cost (Paid to Shipper) | $50 / Ton |
| F4 | Contractual Freight Markup (Charged to Buyer) | $75 / Ton |
Hidden Logistics Arbitrage (Cell F5):
Logic: ($75 - $50) × 1,000 = $25,000 USD.
By controlling the freight (CIF), Kamal engineers a hidden $25k profit margin simply by marking up the logistics cost to the buyer.
If Kamal executes CIF, but the buyer takes too long to unload the ship at the destination port, the shipping line charges a daily penalty (Demurrage). Kamal must protect his margin.
| Cell | Data Label | Forensic Input Value |
|---|---|---|
| G2 | Daily Demurrage Rate (Shipping Line) | $5,000 / Day |
| G3 | Days Delayed at Port | 4 Days |
| G4 | Demurrage Charged to Buyer (Contractual) | $5,000 / Day |
Demurrage Liability Shield (Cell G5):
Logic: The shipping line charges Kamal $20,000. Kamal passes that exact $20,000 charge through to the buyer. The net liability is $0 USD.
If Kamal fails to write a back-to-back demurrage clause in his sales contract, he must absorb the $20,000 penalty, wiping out his hidden logistics margin.