2 Tax Rationale for Hedging. A firm is expected to earn an income of USD 100,000 before depreciation and taxes during the next year. (Deduct depreciation to calculate taxable income.) However, because of currency risk, the actual income before depreciation and taxes could be either USD 30,000 or USD 170,000 with equal probability (the expected value is maintained at USD 100,000). The firm depreciates its assets by USD 50,000 annually, an amount not affected by currency movements. The tax rate is 40 percent, and there is no tax credit associated with losses. Assume that hedging reduces volatility to zero and guarantees an income before depreciation and taxes of USD 100,000. Calculate taxes in the unhedged and hedged scenarios. What is the expected saving in taxes resulting from hedging