A stock is at Rs 900 and pays a Rs 10 dividend in one month. The three-month 900 call is 48 and the 900 put 30, rate 7% continuous. Check put-call parity, and if it fails, build the arbitrage.

Parity fails: call minus put is 18, but spot less the present value of the dividend and the strike is only about 5.67, so the call is about 12.33 too expensive relative to the put. Sell the call at 48, buy the put at 30 and buy the stock at 900, borrowing 882. At expiry the stock, put and short call are worth exactly 900; with the dividend reinvested and the loan repaid, about 12.55 a share is left, the 12.33 grown at 7%.

A call and a short put at the same strike together oblige you to buy the stock at 900 at expiry, whichever way it goes: that is a forward contract. A forward to buy at 900 is worth today's share price, less the dividend you will not receive because you do not own the share yet, less the present value of the 900 you will pay. It is like agreeing today to buy a flat in three months at a fixed price: the agreement is worth the flat's value now, less the rent you will miss in the meantime, less what the purchase price is worth today. With a 7% rate, the dividend in one month is worth 9.94 today and the strike in three months 884.39, so call minus put should be 900 less 9.94 less 884.39, about 5.67.

Sell the rich side and hedge it with the cheap side. Sell the call for 48, buy the put for 30 and buy the stock for 900, borrowing the net 882; at expiry the stock plus the put minus the call is worth exactly 900 whatever the stock does, because above 900 the call is exercised against you and below 900 you exercise the put. Along the way the stock pays the Rs 10 dividend in one month, which you invest to expiry. At expiry you receive 900, add the dividend grown to 10.12 and repay the loan grown to 897.57, leaving 12.55 a share: the 12.33 mispricing carried forward at 7%.

Four things, each with a number. The dividend: the position is long the stock, so it relies on receiving Rs 10; if the dividend were cancelled, parity would say 15.61 and the edge would fall from 12.33 to 2.39. Funding: the prices imply a financing rate of about 12.6% a year, so a desk that can only borrow at a rate near that has no trade; the market may simply be telling you money is dearer than 7% for this stock. Execution: 48 and 30 may be mid prices, and selling the call at the bid and buying the put at the offer can easily eat several rupees of the 12.33. And exercise style: the analysis assumes European options; if the call could be exercised early, just before the dividend, the short call could be taken away and the stock with it. Check each before calling the edge free money.

The view to give is measured. The gap is large enough to be worth checking, and parity mispricings this size in a liquid name are usually explained by one of the four items above rather than by an oversight in the market. If the dividend is confirmed, the options are European, the desk funds near 7% and the executable prices are close to these, the conversion locks in the difference; if not, the apparent edge is the market's price for one of those risks.