Hedging in an Economy with Asymmetric Taxes: A Comment on Moshe Ayre Milevsky & Eliezer Z. Prisman, Hedging and Pricing with Tax Law Uncertainty: Managing Under an Arkansas Best Doctrine

USC Law School Working Paper No. 98-16

Posted: 25 Dec 1998

See all articles by Michael S. Knoll

Michael S. Knoll

University of Pennsylvania Law School; University of Pennsylvania Wharton School -- Real Estate Department

Multiple version iconThere are 2 versions of this paper

Abstract

This comment describes how to construct a hedging portfolio when the derivatives used to construct the hedge are taxed as capital assets and then compares the after-tax cost of that hedge to the cost of assembling a hedging portfolio when derivatives are taxed as ordinary assets. The former hedge is identical to the hedge that Professors Milevsky and Prisman offer as the most efficient hedge against the risk that a hedge will be taxed as a capital asset. This comment then shows that hedging produces a tax benefit when hedges are definitely taxed as ordinary assets, but it has a tax cost when they are definitely taxed as capital assets. This comment also argues that even if hedges are definitely taxed as capital assets, taxpayers can effectively receive ordinary tax treatment by embedding them in contingent debt.

JEL Classification: G11, G13, H21

Suggested Citation

Knoll, Michael S., Hedging in an Economy with Asymmetric Taxes: A Comment on Moshe Ayre Milevsky & Eliezer Z. Prisman, Hedging and Pricing with Tax Law Uncertainty: Managing Under an Arkansas Best Doctrine. USC Law School Working Paper No. 98-16. Available at SSRN: https://ssrn.com/abstract=140491

Michael S. Knoll (Contact Author)

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-898-6190 (Phone)
215-573-2025 (Fax)

University of Pennsylvania Wharton School -- Real Estate Department ( email )

Philadelphia, PA 19104-6330
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
651
PlumX Metrics