Abstract

Tax Asymmetry and Hedging:
The Multi-Period Case

R. Eldor, I. Zilcha

Tel-Aviv University

We study the optimal decision, regarding production and hedging, of a competitive firm under price uncertainty. The firm faces asymmetric tax (i.e., profits and losses are taxed at different rates) and has access to futures markets. The main findings are: (a) Risk neutral firms will engage in hedging in order to lower the expected tax. Moreover, their output increases as a result of such hedging operations. (b) For the multi-period case the tax code regarding carry-forward and carry-back of losses plays an important role. (c) The optimal hedging policy differs significantly compared with the symmetric tax case.