Tax Incentives to Hedge

Posted: 2 Sep 1997

See all articles by John R. Graham

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Clifford W. Smith

Simon Graduate School of Business, University of Rochester

Date Written: Undated

Abstract

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

Graham, John Robert and Smith, Clifford W., Tax Incentives to Hedge (Undated). Simon School of Business Working Paper FR 96-03. Available at SSRN: https://ssrn.com/abstract=10622

John Robert Graham (Contact Author)

Duke University ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Clifford W. Smith

Simon Graduate School of Business, University of Rochester ( email )

Carol Simon Hall 3-202C
Rochester, NY 14627
United States
585-275-3217 (Phone)
585-442-6323 (Fax)

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