International tax arbitrage, currency options and put-call parity conditions
AbstractUsing a finite-horizon general equilibrium model with uncertainty and money, we characterize situations where tax arbitrage opportunities may arise for international portfolio investors in an economy with heterogeneous capital income taxation where foreign currency exposure can be hedged using forward contracts and a set of currency options. We obtain tax-modified option prices similar to the no-tax ones, but augmented by tax-induced “risk-premium” terms; tax-modified put-call parity conditions are derived that revert to their standard (no-tax) format if the respective marginal agents in the bond and option markets are in identical tax brackets.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.
Volume (Year): 22 (2012)
Issue (Month): 3 ()
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Web page: http://www.elsevier.com/locate/intfin
Tax arbitrage; Currency option; Put-call; Martingale;
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- F3 - International Economics - - International Finance
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
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