What does it mean for a tax code to be convex

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Reference no: EM13897574

1. Why would an entrepreneur find it desirable to hedge his or her foreign exchange risk?

2. Explain Modigliani and Miller's argument that hedging is irrelevant. What are the most likely violations of Modigliani and Miller's assumptions in actual markets?

3. Suppose that after joining the treasury department of a large corporation, you find out that it avoids hedging because the cost of hedging comes out of the treasury department's budget. What argument could you make to the CFO to get the firm interested in letting you be the firm's hedging guru?

4. Your CFO thinks that the value of your firm fluctuates enormously with the yen-dollar exchange rate, but he does not want to hedge because he thinks it is an impossible risk to hedge. Can you convince him otherwise?

5. What does it mean for a tax code to be convex? If a country's corporate tax rate is flat, does it make sense for a firm to hedge?

6. 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?

Reference no: EM13897574

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