These factors can cause a spread to be wider or narrower than the amount of the estimated carrying charges. Other factors in the commodities futures markets that affect the movement of a spread include economic conditions, expectations of the size of a pending crop, weather conditions, political factors, demand, and merchandising considerations. A significant factor that affects the amount of the spread between delivery months is the estimated carrying charges, or the costs associated with taking delivery of a commodity in the nearby month and holding it until the distant month. Several factors can affect the movement of the spread. Whether the spread widens or narrows depends on the relative movements of the prices between the two delivery months of the straddle. How the spread widens or narrows affects the profit or loss of a commodity futures straddle. The "spread" refers to the difference in price between the commodity futures contracts for the two delivery months. For example, a commodity futures straddle may involve simultaneously holding a long position in a commodity for one delivery month and a short position in the same commodity for a different month. In fact, an investor can construct a straddle that will yield a profit if the investor has correctly predicted future price movements. Not all straddles are designed to shield investors from economic consequences. With a focus on a foreign currency straddle transaction example, this article discusses the scope and application of Secs. Foreign currency transactions raise complex tax issues that taxpayers must address to withstand an IRS challenge. 1092) govern certain aspects of the timing and character of income or loss recognized through straddle transactions. Because of the potential for abusive transactions, however, Congress has enacted specific rules governing the tax consequences of entering into straddles. Under the Internal Revenue Code, straddles are not viewed per se as a tax- avoidance strategy but rather as investments that can be entered into with the intent to earn profits as part of legitimate business transactions. One such strategy is foreign currency straddles, which, however, may carry hidden tax issues. Hedging strategies and derivatives may be used to manage foreign currency exposure. This in turn has squeezed the overseas profits of, and otherwise created negative foreign currency exposure for, U.S.-based multinationals, while providing a lucrative playing field for foreign currency trading specialists. dollar has risen in recent years against many other currencies. 988, 1092, and 1256, should be considered in determining the correct tax treatment. The effects of several Code sections, in particular Secs. For tax purposes, an issue often arises of when a trader can deduct embedded losses in such transactions and whether expenses incurred in the transactions must be capitalized.Typically, these strategies involve the purchase and sale of derivative contracts in large notional amounts with positons entered into strategically to reduce the risk of loss. Besides being used for hedging, foreign currency straddles can be used in foreign currency arbitrage trading strategies.1092 governing the timing and character of income or loss. Hedging strategies and derivatives used to manage foreign currency exposure include foreign currency straddles, which are subject to rules under Sec.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |