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the day the contracts had initially been entered into until the
day the initial loss leg of the contract is closed.
In the above scenario, when the loss leg is closed by
“cancellation” and simultaneously replaced with a new forward
contract, the purpose of going through the formality of
“canceling” the loss leg of the forward contract and replacing it
(instead of directly “offsetting” the loss leg) was to attempt to
convert the capital loss that petitioners concede would have been
associated with the offset procedure into an ordinary loss that
Holly claims is associated with a “cancellation.”
When a loss leg of a straddle is closed by cancellation and
terminated (i.e., no replacement or offset contract is
purchased), as well as when a loss leg of a straddle is closed
and a replacement contract is purchased (as distinguished from
closing by offset), the loss leg of the contract is closed or
terminated as of the date of the closing, and the parties have
effectively locked in the "loss" on that leg of the straddle,
reflecting simply the change, due to shifts in the interest
rates, in the nominal value of that leg from the day the leg was
entered into until the day of the closing of the leg.
When Holly closed a loss leg of a straddle and no
replacement or offset contract was purchased, Holly paid AGS what
was referred to as a “cancellation” fee equal to and representing
the loss that had been realized on just that leg of the straddle.
When Holly closed a loss leg and replaced it, Holly also
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Last modified: May 25, 2011