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Tax-loss carryforward and futures hedging

Author

Listed:
  • Donald Lien

    (University of Texas, San Antonio, TX, USA)

  • Michael Metz

    (University of Texas, San Antonio, TX, USA)

Abstract

Our research is motivated by the Corn Products vs Arkansas Best Supreme court decisions that brought on the controversy of the tax treatment of gains and losses from futures hedging. The usefulness of a futures contract as risk management tool depends on the tax code. In this paper we address implications of capital treatment of futures positions (disallowing offset for tax purposes) when tax-loss carryover is allowed. Our analysis utilizes a two-period model to capture the inter-temporal effects. We investigate the optimal hedge ratios under these scenarios analytically where possible, and numerically where necessary. Copyright © 2002 John Wiley & Sons, Ltd.

Suggested Citation

  • Donald Lien & Michael Metz, 2002. "Tax-loss carryforward and futures hedging," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 23(7), pages 417-425.
    • Handle: RePEc:wly:mgtdec:v:23:y:2002:i:7:p:417-425
    DOI: 10.1002/mde.1089
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    References listed on IDEAS

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    1. Mian, Shehzad L., 1996. "Evidence on Corporate Hedging Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(3), pages 419-439, September.
    2. Ronald W. Anderson & Jean-Pierre Danthine, 1983. "The Time Pattern of Hedging and the Volatility of Futures Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(2), pages 249-266.
    3. Lien, Da-Hsiang Donald, 1992. "Optimal hedging and spreading in cointegrated markets," Economics Letters, Elsevier, vol. 40(1), pages 91-95, September.
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