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International tax arbitrage, currency options and put-call parity conditions

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  • Strobel, Frank

Abstract

Using a finite-horizon general equilibrium model with uncertainty and money, we characterize situations where tax arbitrage opportunities may arise for international portfolio investors in an economy with heterogeneous capital income taxation where foreign currency exposure can be hedged using forward contracts and a set of currency options. We obtain tax-modified option prices similar to the no-tax ones, but augmented by tax-induced “risk-premium” terms; tax-modified put-call parity conditions are derived that revert to their standard (no-tax) format if the respective marginal agents in the bond and option markets are in identical tax brackets.

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  • Strobel, Frank, 2012. "International tax arbitrage, currency options and put-call parity conditions," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 473-486.
    • Handle: RePEc:eee:intfin:v:22:y:2012:i:3:p:473-486
    DOI: 10.1016/j.intfin.2012.01.005
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    References listed on IDEAS

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    Cited by:

    1. Strobel, Frank, 2012. "International tax arbitrage and residence vs. source-based capital income taxation," Research in Economics, Elsevier, vol. 66(4), pages 391-397.

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    More about this item

    Keywords

    Tax arbitrage; Currency option; Put-call; Martingale;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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