The following questions are based on Lecture 2, and related to Smith, Clifford W., Jr., 1995.

"Corporate risk management: Theory and practice." Journal of Derivatives 2, 21-30. This paper is referred as "Smith (1995)" in the questions.

Question 3. According to Smith (1995), which of the following statements is NOT correct?

A) One condition to make hedging potentially reduce the firm's total tax burdens over the years is that tax needs to be a concave function of the firm's profits.

1. Hedging benefits for tax reasons are higher for startups
2. Hedging benefits for tax reasons are higher for firms with highly volatile profits.
3. Hedging benefits for tax reasons are higher firms on the border of progressive tax brackets

E) None of the above