Call option replicating portfolio

So the question asks: Find the option price and the replicating strategy.

Section - replicating a call option - Actuarial Outpost

In either case the amount owed at time 1 includes interest of 7. The part you don't understand is related to forming so-called replicating portfolios.

More specifically, using only the stock and a risk-less cash account, the question is 'How can one build a portfolio allowing to perfectly replicate the option's behaviour over a given time frame' here a period of the binomial tree. But we can determine them easily.

Rational pricing - Wikipedia

This yields two equations:. A subtle point here: In other words, you are long the option but short the replication portfolio.

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Replication strategy of European call option. So the solution is: This yields two equations: Quantuple 7, 1 6 Sign up or log in StackExchange.

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