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During December 1999, Evergreen Trading established two
substantially similar offsetting currency options that were
executed on December 10, 1999, and that had expiration dates of
December 21, 1999, and settlement dates of December 21, 2001.
The costs of the premiums of those currency options were
$93,861,797 and $93,861,531, respectively. The combined posi-
tions were established so that one position was guaranteed to
have a payout equal to the total premiums of both positions,
while the other position was guaranteed to have a minimal payout.
The first position created a gain if the CZK/EUR4 was at or above
a set exchange rate, while the second position created a similar
gain if the CZK/EUR was below the same exchange rate. The
position not incurring a gain and having a minimal payout was
settled on December 21, 1999, with a loss reported of $89,215,088
after a payout of $4,646,709. The second position was partially
unwound on December 30, 1999, for proceeds of $102,820,761 and a
reported gain of $49,788,977.
As a result of the above-described currency transactions,
Evergreen Trading reported in its 1999 partnership tax return a
total ordinary loss from currency trades of $39,426,091. A
portion of such loss totaling $11,691,521 was allocated to
petitioners’ respective flowthrough entities.
4CZK/EUR reflects the exchange rate of Czech korunas for
Euros.
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Last modified: November 10, 2007