Mike is a developer who has applied for a permit to build office space in a neighborhood that is zoned exclusively for residential housing. In light of anticipated trends in the economy, Mike has been warned that this project is associated with a high degree of liquidity risk.

(a) With regard to this project, what is liquidity risk?

(b) In order for Mike to successfully obtain the permit, what must Mike also obtain from the local zoning authorities so that he is able to build the office space?

(c) If Mikes application to obtain the permit is rejected, how could use of an option contract help Mike minimize any financial loss incurred as a result of this failed project?

(d) Assuming Mike does obtain the permit, what is one thing in addition to the option contract that Mike can do to minimize his exposure to any risk associated with this project?