So corporate profits are taxed as a percentage of the positive earning, but losses will not generate any taxes. Hence taxation have a clear option structure where the government has a call option on the profits generated by the company.

Has there been any research on delta hedging this negative delta exposure from this tax option? For example increasing the leverage of the firm or (for publicly traded companies) by stock repurchase. Of course the hedging will change the value of the underlying and thus in turn change the amount needed to be hedged, which makes the problem somewhat complicated. Also there is no definite end point (only stops at bankruptcy).

This seems like an interesting area of research, but I could not find any references to it online. Are there any other areas (besides standard derivative trading) where techniques for delta hedging have been applied?

  • $\begingroup$ Is this really true? Losses can be carried forward and deducted against future profits in many jurisdictions. $\endgroup$ – dm63 Sep 8 '16 at 8:26

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