Hostname: page-component-78c5997874-94fs2 Total loading time: 0 Render date: 2024-11-02T18:33:14.427Z Has data issue: false hasContentIssue false
  • English
  • Français

Reserving for deferred capital gains tax (an application of option pricing theory)

Published online by Cambridge University Press:  20 April 2012

M. Sherris
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper sets out a framework, based on option pricing theory, that can be used to assess the value of deferred unrealised capital gains tax. In the U.K. and Australia, capital gains tax is paid on realisation of assets and the basis for determining the tax allows for inflation indexation of the cost base of the asset. Capital gains tax payments under these circumstances are shown to resemble those of a complex option. A number of theoretical approaches to the valuation of this option are discussed in the paper.

Keywords

OptionsReservesTaxValuation
Type
Research Article
Information
Journal of the Institute of Actuaries , Volume 119 , Issue 1 , 1992 , pp. 45 - 67
Copyright
Copyright © Institute and Faculty of Actuaries 1992

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Abramowitz, M. & Stegun, I. A. (1965). Handbook of Mathematical Functions. Dover Publications, New York, 936–940.Google Scholar
Boyle, P. P. (1977). Options: A Monte Carlo Approach. Journal of Financial Economics, 4, 323–338.CrossRefGoogle Scholar
Cadwell, J. H. (1951). The Bivariate Normal Integral. Biometrika, 38, 475–479.Google Scholar
Constantinides, G. M. (1983). Capital Market Equilibrium with Personal Tax. Econometrica, 51, 611–636.Google Scholar
Daykin, C. D. & Hey, G. B. (1990). Managing Uncertainty in a General Insurance Company. J.I.A., 117, 173.Google Scholar
Geske, R. (1979). The Valuation of Compound Options. Journal of Financial Economics, 7, 63–81.CrossRefGoogle Scholar
Gupta, S. S. (1963a). Probability Integrals of Multivariate Normal and Multivariate t. Annals of Mathematical Statistics, 34, 792–828.Google Scholar
Gupta, S. S. (1963b). Bibliography on the Multivariate Normal Integrals and Related Topics. Annals of Mathematical Statistics, 34, 829–838.CrossRefGoogle Scholar
Hall, M., Gelte, A., Rush, D. & Simmons, P. (1990). Capital Gains Tax Reserves. Quarterly Journal of The Institute of Actuaries of Australia. September, 11–15.Google Scholar
Johnson, H. (1987). Options on the Maximum or the Minimum of Several Assets. Journal of Financial and Quantitative Analysis, 22, 277–283.Google Scholar
Jarrow, A. J. & Rudd, A. (1983). Option Pricing. Richard D. Irwin, Homewood, Illinois.Google Scholar
Margrabe, W. (1978). The Value of an Option to Exchange One Asset for Another. Journal of Finance, 33, 177–186.Google Scholar
Merton, R. C. (1969). Lifetime Portfolio Selection under Uncertainty: The Continuous Time Case. The Review of Economics and Statistics, 51, 247–257.CrossRefGoogle Scholar
Samuelson, P. A. (1969). Lifetime Portfolio Selection by Dynamic Stochastic Programming. Review of Economics and Statistics, 51, 239–246.CrossRefGoogle Scholar
Sherris, M. (1989a). Options: Pricing and Applications. Paper presented to The Institute of Actuaries of Australia Biennial Convention.Google Scholar
Sherris, M. (1989b). Capital Gains Tax; An Application of Option Pricing Theory. Quarterly Journal of The Institute of Actuaries of Australia, December, 35–49.Google Scholar
Stiglitz, J. E. (1983). Some Aspects of the Taxation of Capital Gains. Journal of Public Economics, 21, 257–294.Google Scholar
Stulz, R. M. (1982). Options on the Minimum or the Maximum of Two Risky Assets. Journal of Financial Economics, 10, 161–185.CrossRefGoogle Scholar
Wilkie, A. D. (1987). An Option Pricing Approach to Bonus Policy. J.I.A., 114, 21–77.Google Scholar