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

Frank Strobel

Journal of International Financial Markets, Institutions and Money, 2012, vol. 22, issue 3, 473-486

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.

Keywords: Tax arbitrage; Currency option; Put-call; Martingale (search for similar items in EconPapers)
JEL-codes: F3 H2 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:22:y:2012:i:3:p:473-486

DOI: 10.1016/j.intfin.2012.01.005

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