Tax-loss carryforward and futures hedging

Donald Lien and Michael Metz
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Donald Lien: University of Texas, San Antonio, TX, USA, Postal: University of Texas, San Antonio, TX, USA
Michael Metz: University of Texas, San Antonio, TX, USA, Postal: University of Texas, San Antonio, TX, USA

Managerial and Decision Economics, 2002, vol. 23, issue 7, 417-425

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.

Date: 2002
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Persistent link: https://EconPapers.repec.org/RePEc:wly:mgtdec:v:23:y:2002:i:7:p:417-425

DOI: 10.1002/mde.1089

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