Introduction to Premium Discovery Contracts

Introduction to Premium Discovery Contracts

With economic developments and structural changes observed in recent years, investors have faced new operational and financial requirements. One of the most critical responsibilities of goods producers is procuring essential raw materials, as production planning requires continuous access to them. Buyers also seek certainty regarding the acquisition of required goods within a specified period. The premium discovery contract is a modern financial instrument introduced by the commodity exchange to address these needs.

Through premium discovery contracts, producers and consumers of commodities enter into long-term commitments to secure the supply of specific goods on predetermined future dates. The use of this contractual instrument is particularly beneficial for industries that maintain ongoing commercial interactions.

Concept and Legal Foundations of Premium Discovery Contracts in the Oil and Gas Industry

Premium discovery contracts are long-term agreements traded in the physical market of the Iran Mercantile Exchange. Under this type of contract, the parties agree to trade a specified commodity at a future date, with the final price calculated as a base price plus or minus an agreed premium. The premium is the amount or percentage added to or deducted from the base price to determine the final transaction price.

At contract closure, the buyer must deposit a portion of the transaction value as a guarantee with the clearing house. Settlement of the remaining amount is conducted in accordance with the terms agreed upon by the parties during contract formation. Commodities such as copper pipes, epoxy resin, and sponge iron have previously been traded through premium discovery contracts.

Method of Calculating the Final Price

It should be noted that the transaction price under this type of contract is not fixed at the time of contract execution. The final price is determined through a formula consisting of two components:

• The base price.
• The contract premium.

The buyer and seller agree on the premium at contract execution. The base price is announced at the time specified in the offering notice by an authority approved by the commodity exchange.

Differences Between Premium Contracts, Futures Contracts, and Forward Sale Contracts

In a forward sale contract, the buyer is obligated to pay the full agreed price at the time of contract execution, and the seller is obligated to deliver the specified goods at maturity in accordance with the agreed quantity and price.

In futures contracts, full payment at the time of execution is not required. Instead, the parties agree to trade a specified quantity of goods, with predetermined quality and price, on a future date. A portion of the transaction value is deposited as a margin with the clearing house, and profits and losses are calculated daily. The seller must deliver the goods at maturity, and the buyer must pay the agreed price.

Premium discovery contracts operate similarly to futures contracts but differ in that the final transaction price is not predetermined and is calculated through a specified pricing formula.

Advantages of Premium Discovery Contracts

The operational structure of premium contracts provides several benefits for both buyers and sellers, including:

• Risk management and hedging for both purchasing and supplying parties.
• The ability to establish long-term contractual relationships within a regulated legal framework.
• Fairness and transparency in commodity transactions.
• Increased efficiency throughout supply chains and production processes.

Information Included in Premium Discovery Contract Offering Notices

Offering notices for premium discovery contracts typically include the following details:

• Date of premium discovery transaction.
• Base premium price proposed by the supplying broker.
• Settlement deadline for the premium discovery transaction.
• Reference authority for determining the base price.
• Formula for calculating the final transaction price.
• Amount of advance payment for the final transaction.
• Provisional pricing terms.
• Type of final contract.
• Final transaction date.
• Settlement method for premium discovery contracts.
• Settlement method for final contracts.
• Type and rate of premium discovery guarantees.
• Type and rate of supplementary guarantees.

Frequently Asked Questions Regarding Premium Discovery Contracts