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investor "closes out" or "locks in" the gain or loss by way of
offset, by way of cancellation and replacement contracts, or by
way of cancellation and termination, the transaction is exactly
the same -- in purpose, in effect, and in substance -- and
produces exactly the same type of taxable gain or loss -- in the
instant cases capital gain or capital loss.
As the U.S. Court of Appeals for the Fifth Circuit stated,
implicit in the realization or "lock in" of the gain or loss
associated with straddle transactions or with legs thereof
(whether the lock in is effected by way of offset, cancellation
and replacement, or cancellation and termination) is the
agreement and understanding that actual purchases and sales have
occurred with respect to the price-differential and interest-
sensitive risk for T-Bonds and GNMA’s that each party accepted
when the commodity straddle transaction was first entered into.
In each case, the investor assumed the risk of swings in the
price of such Government securities for whatever time each leg of
the contract was outstanding.
Regardless of when and how a loss position in a commodity
forward contract is extinguished, closed, settled, terminated, or
canceled, at any one point in time during the length or duration
of the contract, the investor in fact has participated in exactly
the transaction for which the investor contracted from the time
the transaction was first entered into until the day the investor
chooses to close or terminate that leg. The investor got exactly
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