Swaps are agreements between two counterparties to exchange a series of cash payments for a stated period of time. The periodic payments can be charged on fixed or floating price, depending on the terms of the contract. One of the commonly used commodity swaps is “fixed-for-floating swaps”

In a “fixed-for-floating commodity swap”, one party known as the “fixed price payer” makes periodic payments based on a fixed price for a specified commodity that is agreed upon at the execution of the swap, while the other party known as the “floating price payer” makes payments based on a floating price for such commodity that is reset periodically.

The cost of carry has two components - Interest cost (for 180 days) and storage cost (for 180 days)

Interest Cost = 35000 x .09 (Interest rate) x ( 180 /365) for 180 days

= 35000 x .09 x 0.4931

= 1553.26

Storage Cost = 35000 x .02 (Storage cost) x (180/365) for 180 days

= 35000 x .02 x 0.4931

= 345.17

So the total cost of carry will be 1553.26 + 345.17 = 1898.43

If futures price is lower than spot price of an asset, market participants may expect the spot price to come down in future. This expectedly falling market is called “Backwardation market”.

This backwardation inspite of cost-of-carry arises due to seasonality factors in commodities especially in agricultural products. For e.g. during sowing season, spot supplies are less while it increases during harvesting month which will come after around 3 months. Hence, spot prices are expected to be lower during harvesting months (i.e., 3 months later) than the present spot price (i.e., while sowing).

The Black-Scholes model was published in 1973 by Fisher Black and Myron Scholes. It is one of the most popular, relatively simple and fast modes of calculation of option prices.

This model is used to calculate a theoretical price of options using the five key determinants of an option’s price: underlying price, strike price, volatility, time to expiration, and short-term (risk free) interest rate. This model provides the formula to calculate price of options based on cash settlement or physical settlement of Options on goods / securities.

Short position means Mr. Suresh has sold the futures contract expecting the prices to fall. He can only make a profit if the futures prices fall.

For eg. Mr. Suresh sells a futures contract at Rs 100. The price falls and on expiry the price is Rs. 90. Here he will make a profit of Rs. 10.

Selling a call option means the view is bearish (price to fall). Mr. A has sold a call option but the price has risen from Rs.40000 to Rs. 42000. This means there is a loss of Rs. 2000. He has however earned a premium of Rs.600.

So his net loss is Rs. 2000 – Rs. 600 =  Rs. 1400

Rs 1400 is the loss for 10 grams.

So for 1 kg or 1000 grams (lot size) the loss is  (1000 x 1400 / 10) =   Rs 140000.