For corporations facing tax-function convexity, hedging lowers expected tax liabilities, thereby providing an incentive to hedge. We use simulation methods to investigate convexity induced by tax-code provisions. On average, the tax function is convex (although in approximately 25 percent of...

We quantify the tax savings from hedging by modeling major provisions of the tax code. Using data from COMPUSTAT, we simulate likely tax savings from reducing the volatility of taxable income. The average tax savings from a 5 percent volatility reduction is $142,360 or about 3 percent of taxable...