10
Occasionally, an investor may wish to terminate or "lock in"
the gain or loss on only a particular leg of a commodity forward
contract or straddle. The procedure is essentially the same, and
the transaction is essentially the same, regardless of which of a
number of available methods is utilized to lock in the gain or
loss on a particular leg of a commodity straddle transaction that
has occurred up until that point in time.
True cancellations of forward contracts, where the
transaction or contracts are vitiated ab initio, only occur when
forward contracts contain errors.
When interest rates change at any time during the period of
time that forward contracts are open, the value of the straddle
increases or decreases, but that increase or decrease is
moderated by the fact that as one leg of the straddle increases
in value, the other leg decreases in value by a similar amount.
Although the change in value of a given straddle remains fairly
constant, one particular leg of a straddle may reflect a large
loss and the other leg may reflect a large gain when interest
rates fluctuate widely and when the other leg of the straddle is
not considered. It was at such a point in time that Holly, for
income tax purposes, occasionally would close by offset or by
"cancellation" only a loss leg of a straddle and simultaneously
replace the loss leg with a new contract for a slightly different
delivery date, thereby locking in the loss on the first leg and
the gain on the second leg of the straddle that had occurred from
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Last modified: May 25, 2011