Tax Incentives to Hedge
Posted: 2 Sep 1997
Date Written: Undated
We quantify the tax savings from hedging by modeling major provisions of the tax code. Using data from COMPUSTAT, we simulate likely tax savings from reducing the volatility of taxable income. The average tax savings from a 5 percent volatility reduction is $142,360 or about 3 percent of taxable income. In identifiable cases, the savings approach 8 percent. To judge the importance of these magnitudes: (1) This tax-related benefit of hedging must be compared with the cost of hedging; (2) it should be considered that tax savings from hedging are not mutually exclusive from other hedging benefits.
JEL Classification: G32, K34
Suggested Citation: Suggested Citation