Question: This question is designed to make sure you know how to derive the Black-Scholes partial differential equation (pde). a) What is the role of hedging?

This question is designed to make sure you know how to derive the Black-Scholes partial differential equation (pde).

a) What is the role of hedging? Why is this hedge portfolio also called a replicating portfolio?

b) Why does the Black-Scholes pde not have a stochastic component?

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