Can anyone teach me about this 2 financial calculation??

Question

Firstly,
What is the correlation coefficient between company X and Y when their respective standard deviations are 0.20 and 0.10 and have a covariance of 0.006?

Secondly,
Assume that shares in BHP Billiton Ltd (BHP) are trading at $26.95 and a dividend of $0.23 is expected to be paid in 30 days. The risk-free rate is estimated to be 5.50% p.a. What is the price of a BHP share futures contract with expiry in 70 days?

Answer 1

Okay.... these are about the most advanced Q's I have ever seen on Yahoo ..

Still, let's have a stab at them ..
1) Is simple maths .. read the introduction link below & then check out the formula in wikipedia (and choose the one that applies in this case)

2) Is a bit more interesting ..
In 2007, BHP dividends were paid between 20 and 26 days after the stock went ex-dividend.

If the dividend is due in 30 days, then the stock in NOT trading ex-dividend today, however it WILL be xd when the contract expires.

This complicate matters some-what, since, when the stock goes xD it should (in theory) drop by $0.23.

SO, what would the price be in 70 days ?

At first sight we would assume 26.95 - .23 = 26.72 ... however this ignores the 'time value' of money....

This is explained in Wikipedia as :-
"In a futures contract, for no arbitrage to be possible, the price paid on delivery (the forward price) must be the same as the cost (including interest) of buying and storing the asset. In other words, the rational forward price represents the expected future value of the underlying discounted at the risk free rate"

SO, (easy answer) is to discount 26.95 for 70 days and then subtract (23c discounted for 30 days)

[this is my 'best guess', however perhaps 'someone who knows'; will answer :-) ]

Answer 2

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