The prices of European call and put options on a dividend-paying stock with 6 months to maturity and a strike price of $125 are $20 and $5, respectively. If the current stock price is $140, what is the implied annual continuously compounded risk-free rate? Assume the present value of dividend to be paid out over the next 6 months is $3.
Spot Price - PV of Exercise Price - PV of Dividends = Call
Premium - Put Premium
140 - 125*e-rt - 3 = 20 - 5
125*e-r*0.5 = 122
er*0.5 = 125/122
Applying log on both sides
r = 2* log(125/122) =2.11%
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