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A put option and a call option with an exercise price of $65 expire in three...

A put option and a call option with an exercise price of $65 expire in three months and sell for $.96 and $5.80, respectively. If the stock is currently priced at $68.40, what is the annual continuously compounded rate of interest? (Do not round intermediate calculations. Enter your answer as a percent rounded 2 decimal places, e.g., 32.16.) Rate of interest

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Answer #1

We will use the put call parity relation for continous compounding in oder to calculate the annual continuous compounded rate of interest.

where c and p are call and put premiums respectively, T is time to maturity, K is strike price and S0 is current stock price. r is the risk free rate compoinded continuously.

Taking log on both sides

r = 0.0896

r = 8.96%

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