The tax mismatch

Use the collar of 14.19.2 (3 lots, long the January 24,000 put, short the 25,500 call) on the ₹50 lakh, $\beta = 1.1$ portfolio. The investor is in the 30% slab (31.2% with cess; ignore surcharge). (a) In the −15% case the collar's net payoff after costs is ₹6,14,712. Compute the tax on it, the after-tax hedged outcome (the portfolio loss of ₹8,25,000 is unrealised) as a percentage of the portfolio, and the fraction of the hedge's protection that survives tax. (b) In the +10% case the collar loses ₹2,88,027. Compute the tax saved if the loss is set off against business income taxed at 31.2%, and if it is set off against realised long-term capital gains taxed at 12.5%. What happens if the investor has neither in the year? (c) Explain why selling the shares at a loss in the −15% case does not reduce the tax on the hedge gain, and state the rule that a business loss on the hedge follows instead in (b).