Tax asymmetry and futures hedging under liquidity constraints

This paper examines the optimal futures hedging decision of a firm facing uncertain income that is subject to asymmetric taxation with no loss‐offset provisions. All futures contracts are marked to market and require interim cash settlement of gains and losses. The firm is liquidity constrained in that it is forced to prematurely close its futures position on which the interim loss incurred exceeds a threshold level. The liquidity risk created by the interim funding requirement of a futures hedge is shown to proffer the firm perverse incentives, thereby making an under‐hedge optimal. This under‐hedging result holds irrespective of whether the firm is risk neutral or risk averse. Copyright © 2005 John Wiley & Sons, Ltd.     

Production and hedging in futures markets with multiple delivery specifications

This paper examines the behavior of the competitive firm under price uncertainty. To hedge the price risk, the firm trades unbiased commodity futures contracts with multiple delivery specifications from which delivery risk prevails. We show that the firm optimally produces less in the presence than in the absence of the delivery risk. We show further that the concept of expectation dependence that describes how the delivery risk is correlated with the random spot price plays a pivotal role in determining the firm’s optimal futures position. Specifically, an under-hedge is optimal if the random spot price is positively expectation dependent on the delivery risk. The firm’s optimal futures position becomes indeterminate if the random spot price is negatively expectation dependent on the delivery risk.     

Corporate income tax and futures hedging

Our research is motivated by the Corn Products vs. Arkansas Best Supreme Court decisions that pitched the controversy of the tax treatment of gains and losses from futures hedging. The use of futures contracts as risk management tools depends on the tax code. In this paper we address complications in the current tax code that allow for asymmetric offset: Ordinary losses can be applied against capital gains; however, capital losses cannot by applied against ordinary gains. Also we consider the issue of tax loss carryover. We investigate the optimal hedge ratios under these scenarios analytically where possible, and numerically where necessary. Michael Metz is an independent commodity market consultant.     

International tenders and futures hedging

This paper examines the optimal bidding and hedging decisions of a risk‐averse firm that takes part in an international tender. The firm faces multiple sources of uncertainty: exchange rate risk, risk of an unsuccessful tender, and business risk. The firm is allowed to trade unbiased currency futures contracts to imperfectly hedge its contingent foreign exchange risk exposure. We show that the firm shorts less (more) of the unbiased futures contracts when its marginal utility function is convex (concave) as compared with the case that the marginal utility function is linear. We further show that the curvature of the marginal utility function plays a decisive role in determining the impact of currency futures hedging on the firm's bidding behavior. Sufficient conditions that ensure the firm bids more or less aggressively than in the case without hedging opportunities are derived. Copyright © 2006 John Wiley & Sons, Ltd.     

Learning by a dominant firm

This paper is concerned with the optimal output decisions of a dominant firm in the presence of imperfect information about the rival's reactions. The model is multi-period with the profits in each period being independent of those in other periods. Consequently, if the rival's reaction parameter were known to the dominant firm, a myopic policy would be optimal, In the presence of imperfect information about the rival's unknown reaction parameter, the dominant firm acts in a Bayesian manner by updating its prior distribution based on the observations of the rival's outputs. Because of the multiplicative shape of the rival's reaction function, the Bayesian updating rule is a function of the dominant firm's decision variable, i.e. its output decisions. This creates a dependence of the future value of the dominant firm on the present output decision, and hence a myopic policy is not, in general, optimal. It is shown that through output experimentation the dominant firm will tend to overproduce and, consequently, will increase its expected discounted profits (market value).     

Hedging and the competitive firm under correlated price and background risk

This paper examines the behavior of the competitive firm under correlated price and background risk when a futures market exists for hedging purposes. We show that imposing the background risk, be it additive or multiplicative, on the firm has no effect on the separation theorem. The full-hedging theorem, however, holds if the background risk is independent of the price risk. In the general case of the correlated price and background risk, we adopt the concept of expectation dependence to describe the bivariate dependence structure. When the background risk is additive, the firm finds it optimal to opt for an over-hedge or an under-hedge, depending on whether the price risk is positively or negatively expectation dependent on the background risk, respectively. When the background risk is multiplicative, both the concept of expectation dependence and the Arrow–Pratt measure of relative risk aversion are called for to determine the firm’s optimal futures position.     

Tax‐loss carryforward and futures hedging

Our research is motivated by the Corn Products vs Arkansas Best Supreme court decisions that brought on the controversy of the tax treatment of gains and losses from futures hedging. The usefulness of a futures contract as risk management tool depends on the tax code. In this paper we address implications of capital treatment of futures positions (disallowing offset for tax purposes) when tax‐loss carryover is allowed. Our analysis utilizes a two‐period model to capture the inter‐temporal effects. We investigate the optimal hedge ratios under these scenarios analytically where possible, and numerically where necessary. Copyright © 2002 John Wiley & Sons, Ltd.     

Endogenous trading in credit default swaps

We introduce a real options model in order to quantify the moral hazard impact of credit default swap (CDS) positions on the corporate default probabilities. Moral hazard is widely addressed in the insurance literature, where the insured agent may become less cautious about preventing the risk from occurring. Importantly, with CDS the moral hazard problem may be magnified since one can buy multiple protections for the same bond. To illustrate this issue, we consider a firm with the possibility of switching from an investment to another one. An investor can influence the strategic decisions of the firm and can also trade CDS written on the firm. We analyze how the decisions of the investor influence the firm value when he is allowed to trade credit default contracts on the firm’s debt. Our model involves a time-dependent optimal stopping problem, which we study analytically and numerically, using the Longstaff–Schwartz algorithm. We identify the situations where the investor exercises the switching option with a loss, and we measure the impact on the firm’s value and firm’s default probability. Contrary to the common intuition, the investors’ optimal behavior does not systematically consist in buying CDSs and increase the default probabilities. Instead, large indifference zones exist, where no arbitrage profits can be realized. As the number of the CDSs in the position increases to exceed several times the level of a complete insurance, we enter in the zone where arbitrage profits can be made. These are obtained by implementing very aggressive strategies (i.e., increasing substantially the default probability by producing losses to the firm). The profits increase sharply as we exit the indifference zone.     

Safety margins versus profit maximization

Under uncertainty, firms risk bankruptcy. We ask, in symmetric duopoly with stochastic demand, what happens when one firm minimizes the probability of negative profits while the other maximizes expected profits. When fixed costs are small, a firm can reduce the likelihood of negative profits. However, under a large fixed cost, the chance of negative profits increases upon deviation from a profit‐maximizing strategy. In any event, if one firm adopts a safety‐first strategy, the other firm has higher profits and a better survival chance by maximizing expected profit. Finally, we compare a profit maximizing to a safety‐first strategy in relation to ownership and control in firms.     

Uncertainty,hiring and firing costs,and the determinants of profit‐sharing rules

We consider a firm run by a manager who acts on behalf of shareholders. The firm produces a commodity whose demand evolves stochastically over time. The firm's employees possess firm‐specific skills and knowledge and thus can bargain over profits with shareholders immediately before the firm hires or fires workers. The firm will distribute more portions of profits to employees when it incurs higher costs to hire or fire workers. In addition, as uncertainty in demand increases, the firm will distribute smaller (larger) portions of profits to employees if the firm does not have the option to fire (hire) workers.     

Bureaucratic corruption and profit tax evasion

Firms may evade taxes on profits and can also avoid fulfilling legal restrictions on production activities by bribing bureaucrats. It is shown that the existence of tax evasion does not affect corruption activities at the firm level, while the budgetary repercussions of tax evasion induce less corruption. Policy measures which alter the gains or losses from corruption have a non-systematic impact on tax evasion behaviour.      

Thin trading and mispricing profit opportunities in the Canadian commodity futures

This study examines whether thin trading problems in the Canadian futures market can create mispricing profit opportunities for canola and feed wheat futures traded over the period 1981 through 1993. A forecasting model is developed using historical and publicly available information to predict futures closing prices for these contracts, then two trading rules (a confidence interval and a percentage price change filter) are used to determine their profit potentials. The size of profits generated from trading canola futures under either rule during the period 1987–1993 is consistent with C. Carter's (1989) earlier results that no market inefficiency was detected during the 1980–1987 period. Similarly, profits from the Canadian feed wheat thinly traded contracts and from a control group using the highly-liquid American soybean oil and wheat contracts do not violate the efficiency theory. The average gross profit per trade analysis further suggests that net positive profits may not be viable for marginal investors.     

The Incentives for Innovative Activity in the Managerial Firm

This paper discusses the incentives for innovation by a manager‐led firm. In particular, it is investigated how remuneration practices influence the choice of a risky project. In the first place, a dynamic model with uncertainty is used to determine the optimal employment level with exogenous growth and risk. In the second part of the paper, growth and risk are explained by R&D expenditures. Optimal investment expenditures for R&D are derived for (i) the profit‐maximizing firm and (ii) the managerial firm, where the manager receives a fixed salary as well as a variable share of profits. If risk neutrality is assumed, then no difference exists. However, if risk aversion is considered, the managerial firm will invest more into R&D than the owner‐led company. Size‐related salaries are an additional reason for higher expenditures of R&D by managers. Copyright © 2013 John Wiley & Sons, Ltd.     

Cost-reduction innovation under mixed economy

This paper analyzes the innovation strategies of mixed duopoly with a (semi-) public firm and a private firm, and the welfare effects of public ownership are captured. The findings indicate that the private firm is more active in research and development activities than the (semi-) public firm. Meanwhile, the total production increases with the degree of public ownership, and both firms have to suffer losses in profits. From the viewpoint of social welfare, partial nationalization is the optimal strategy. The policy implication of the findings highlights that partial nationalization should be encouraged under mixed economy.     

企业物流外包决策的经济准则

通过建立模型,比较企业物流外包前后的利润水平,提出一个判别物流外包能否增加企业利润的准则。该准则表明,并非只要服务商的成本低于外包企业,外包企业就能通过物流外包提高利润水平,而是存在一个阈值。该阈值由外包企业的生产、销售、自营物流成本等因素综合决定,只有将物流业务外包给成本低于该阈值的服务商,才能提高外包企业的利润水平。     

A two-part incentive scheme to implement productive efficiency over time

Under rate-of-return regulation the firm is not induced to minimize cost. All the incentive regulatory schemes thus far suggested in the literature have the desirable feature of inducing the firm to do so, but they either require the regulator to have full information about demand or take a number of periods to induce the firm to converge to the optimal output level. Hence they do not work well in the dynamic situation where demand and/or cost changes. In this paper a two-part negative price incentive scheme is suggested whereby the regulator will implement the subsidy scheme only if the firm charges a price higher than its unit expenditure. This scheme (1) requires limited information for implementation; (2) induces the firm to minimize costs; and (3) under certain situations leads to optimal behavior in one period. More importantly, it will continue to have the above features over time.     

Corporate hedging and input price risk

Input price variability is an important source of risk for corporations that process raw commodities. Models of optimal input hedging are developed in this paper based on the maximization of managerial expected utility. The relationship between hedging strategies and output decisions is examined to assess the impact of the ability to set output prices on futures market participation. As a firm's ability to set output prices diminishes in the short run, input futures positions increase although the optimal hedge ratio may either increase or decrease. For a perfectly competitive firm, however, shifts in output price caused by input price changes provide a natural cash market hedge of input price risk and reduce the firm's optimal input futures position.     

创业企业融资策略探讨

中小企业融资问题一直是理论界和企业界较为关注的话题。创业企业创立初期规模小、风险大和无盈利的特点造成了其融资困难重重。文中阐述了置身于当前中国风险投资热潮中的创业企业种子期的私募融资策略——吸引风险投资以及步入发展期和成熟期后的公开上市融资策略,并通过对比说明海外创业板市场是创业企业上市的最佳选择。     

Equilibrium asset pricing with Epstein-Zin and loss-averse investors

We study multi-period equilibrium asset pricing in an economy with Epstein-Zin (EZ-) agents whose preferences for consumption are represented by recursive utility and with loss averse (LA-) agents who derive additional utility of gains and losses and are averse to losses. We propose an equilibrium gain-loss ratio for stocks and show that the LA-agents are more (less) risk averse than the EZ-agents if their degree of loss aversion is higher (lower) than this ratio. When all the agents have unitary relative risk aversion degree and elasticity of intertemporal substitution, we prove the existence and uniqueness of the equilibrium and the market dominance of the EZ-agents in the long run. Finally, we extend our results to the case in which the LA-agents use probability weighting in their evaluation of gains and losses.     

Comment: further sufficient conditions for an inverse relationship between productivity and employment

Extant empirical studies document that productivity gains due to technological progress often lead to reductions in employment. This paper rationalizes the stated empirical finding within the context of the theory of the competitive firm under price uncertainty. We show that technological progress affects employment adversely if the firm’s coefficient of relative risk aversion is no less than unity and its production technology exhibits non-decreasing returns to scale. On the other hand, technological progress unambiguously increases output if the firm’s preference has non-increasing absolute risk aversion.