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Corporate income tax and futures hedging

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  • Donald Lien
  • Michael Metz

Abstract

Our research is motivated by the Corn Products vs. Arkansas Best Supreme Court decisions that pitched the controversy of the tax treatment of gains and losses from futures hedging. The use of futures contracts as risk management tools depends on the tax code. In this paper we address complications in the current tax code that allow for asymmetric offset: Ordinary losses can be applied against capital gains; however, capital losses cannot by applied against ordinary gains. Also we consider the issue of tax loss carryover. We investigate the optimal hedge ratios under these scenarios analytically where possible, and numerically where necessary. Copyright Academy of Economics and Finance 2001

Suggested Citation

  • Donald Lien & Michael Metz, 2001. "Corporate income tax and futures hedging," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 25(3), pages 308-315, September.
    • Handle: RePEc:spr:jecfin:v:25:y:2001:i:3:p:308-315
    DOI: 10.1007/BF02745891
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    References listed on IDEAS

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    1. Milevsky, Moshe Arye & Prisman, Eliezer Z., 1999. "Hedging and pricing with tax law uncertainty: Managing under an Arkansas Best doctrine," The Quarterly Review of Economics and Finance, Elsevier, vol. 39(1), pages 147-168.
    2. Kenneth H. Mathews & Duncan M. Holthausen, 1991. "A Simple Multiperiod Minimum Risk Hedge Model," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 73(4), pages 1020-1026.
    3. Lien, Donald & Tse, Yiu Kuen, 2001. "Hedging downside risk: futures vs. options," International Review of Economics & Finance, Elsevier, vol. 10(2), pages 159-169.
    4. Lien, Da-Hsiang Donald, 1992. "Optimal hedging and spreading in cointegrated markets," Economics Letters, Elsevier, vol. 40(1), pages 91-95, September.
    5. Joaquín Arias & B. Wade Brorsen & Ardian Harri, 2000. "Optimal hedging under nonlinear borrowing cost, progressive tax rates, and liquidity constraints," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 20(4), pages 375-396, April.
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    Cited by:

    1. Sticca, Ralph Melles & Nakao, Silvio Hiroshi, 2019. "Hedge accounting choice as exchange loss avoidance under financial crisis: Evidence from Brazil," Emerging Markets Review, Elsevier, vol. 41(C).

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