9
In the context of the straddle transactions of the type
involved in these cases, commodity forward contracts (as with
futures commodity contracts) are not consummated by actual sale
or purchase and delivery of the underlying securities or
commodity. Actual delivery of the underlying securities is not
contemplated. Rather, forward contracts are generally closed by
offset, that is by entering into opposite forward contracts in
the same commodity with the same or similar settlement dates.
When such opposite forward contracts in the same commodity are
entered into, the rights and obligations of the investor in the
initial contracts are simply regarded as terminated.
The parties agree that in the above situation the
termination by offset of the investor's respective positions
constitutes a capital transaction. We emphasize that all that
has happened in closing the transaction by way of offset is that
the investor (at whatever time during the length of the contract
the investor chooses to terminate or lock in the gain or loss
that has occurred with respect thereto as a result of changes in
the price differential and in interest and discount rates
relating to the relevant Government securities from the day the
forward contracts were first entered into until the day the
contracts are closed) simply notifies the other party of the
investor’s desire to close the transaction by offset and, in
effect, the contracts or positions are terminated as of that
point in time.
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Last modified: May 25, 2011