what is the logic of adding the payoff in pricing put and subtracting the payoff From pricing call in replicating portfolio approach.
Example if we have replicated c+ by hS+ & partially borrowing.
At maturity if we are at UPSTATE i.e hS+ – Y(Rf)=payoff at UPSTATE. Therefore hS+(Shares ko becha) -Y(Rf) borrowing pay kiya now we deducting the payoff of upstate and making PV but What’s the logic of deducting payoff of upstate?
Please listen audio for your query.