8
securities to which the contracts are pegged that occur during
the period of time that the contracts remain outstanding. Those
factors will determine the entire net gain or loss whenever the
position is settled or closed out.
No actual purchase or sale of the Government securities to
which the forward contracts are pegged is ever contemplated. In
fact, no specific Government securities are identified as being
associated with the forward contracts. In actuality, the
Government securities to which the forward contracts are
associated are more accurately described as hypothetical
Government securities that, if they existed, would have the same
interest rates and other features as the type of Government
securities to which the forward contracts are pegged.
Pricing of the forward contracts entered into by Holly
occurred in the following manner. Mr. Wolff, on behalf of Holly,
negotiated with ACLI Government Securities, Inc. (AGS), a dealer
in Government securities and a broker of commodity futures
contracts, the price differential -- as of the date the contracts
were entered into -- between the long and short positions of each
straddle and, once that differential was agreed upon, left it to
AGS to assign prices to the two legs of the straddle reflecting
the initial price differential agreed upon. When Mr. Wolff
negotiated with AGS regarding offsetting positions, again he
would negotiate with AGS only the price differential as of the
date the offsetting contracts were entered into.
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Last modified: May 25, 2011