ABSTRACT
The replication of an option by just assets and risk-free investment is a classical problem in finance. We see how to do this replication via Delta hedging, a technique consisting of reorganizing the replicating portfolio to have, at every moment, a quantity of assets equal to the Delta of the option. This technique can be applied to the binomial model and also to the Black-Scholes-Merton model. In the Black-Scholes-Merton model, this replication cannot be exact, and this leads to a hedging error (that is, to a difference between the value of the option and the value of the replicating portfolio).
