If the Tax Code Is Convex and the Forward Rate

question 3

Essay

If the tax code is convex and the forward rate equals the expected future spot rate,why would a firm prefer to pay taxes on the hedged value of a foreign currency cash flow rather than wait to pay the taxes on the realized foreign currency cash flow?

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Definitions:

Deposit Ticket

This is a document that accompanies a bank deposit, listing the amounts of cash and checks being deposited and their respective details.

Negotiable Instrument

A document guaranteeing the payment of a specified amount of money, either on demand or at a set time, with the payer specified on the document.

Endorsement

Signing one's name on the back of a check or other document, authorizing its transfer or acceptance, or the act of publicly supporting a product, service, or candidate.

Cash Receipts

The collection of money, including coins, notes, and electronic payments, received by a business during a given period.