Opinion ID: 521926
Heading Depth: 2
Heading Rank: 3

Heading: The Trading Agreement

Text: 5 After several months of negotiations, DeRance entered into a Commodity Trading Advisor Agreement (Agreement) with Sarnoff and PaineWebber. The Agreement became effective February 23, 1983. The account would be a discretionary gold futures trading account with Sarnoff and PaineWebber serving as DeRance's trading advisor and broker. The Agreement stated in particular that [t]he investment objective of DeRance is to acquire an inventory of physical gold bullion not in excess of 15,000 ounces and to earn premium money during the accumulation of such inventory. p 3(a). Thus, the purpose of this account was not just to accumulate gold but to earn money by trading. In the Agreement, DeRance gave PaineWebber and Sarnoff discretionary authority concerning ... the purchase of gold bullion, the purchase and sale of gold futures contracts, and the granting and purchase of options for the purchase and sale of gold futures in accordance with the trading plan, which was signed by John and Sarnoff and attached to the Agreement. The trading plan in turn describes six separate trading strategies that the parties agreed were appropriate to DeRance's objectives. DeRance did not know, however, that PaineWebber's senior management was skeptical of Sarnoff's trading plan. 3 6 The Agreement expressly sought to limit the amount of risk PaineWebber and Sarnoff could incur in trading the account by providing that PaineWebber could not: 7 (a) Write a gold call option on behalf of the Fund as grantor or enter a futures contract to sell gold unless the Fund has a sufficient inventory of gold to cover the call option and/or the futures contract except to the extent such obligation (or potential obligation) may be offset by a long futures contract or a put option held by the Fund. 8 (b) Write a put option on behalf of the Fund as grantor or enter a futures contract to buy gold unless the Fund has sufficient cash resources to cover the put option and/or the futures contract except to the extent such obligation (or potential obligation) may be offset by a short futures contract or a call option held by the Fund. 9