Can u plz explain the last step..... where we need to show that the a portfolio is a) self financing b) replicating?
For replicating, we need self-financing and the boundary condition, V(T) = X V(t) = exp(-r(T-t))EQ[X|F(t)] set t=T and we have V(T) = X, fine For self-financing we need to show that the change in Vt, ie dVt equals the amount of shares we have Phi(t) times dS(t) plus the amount of cash we have Psi(t) times dB(t) (Phi and Psi are previsible processes) Once we have shown this, we conclude that V(t) is the value of a self-financing portfolio John
