1. Explain how to determine whether to buy or sell futures when hedging.
2. What are the two reasons liquidity risk arises? How does liquidity risk arising from the liability side of the balance sheet differ from liquidity risk arising from the asset side of the balance sheet?
3. Suppose the value of timber (already planted on some given land) is the following function of time: V=100+60t-t2expressed in $1,000. Assuming the discount rate (lending and borrowing rate) is 5% and assuming zero upkeep cost during the period of timber growth, what is the optimal time to cut the timber for sale?