Consider a European put option on the stock XYZ, with a $40 strike and 1 year to expiration. The stock does not pay dividends, and its current price is $41 The continuously compounded risk-free interest rate is 8%. The possible stock prices over 1 year is either $60 or $30. To find the replicating portfolio, using delta for the number of shares needed and y the amount of risk-free borrowing, we solve: 60 x delta - 1.083 y = 0; 30 x delta - 1.083 y = 10 60 x delta - 1.083 y = 30; 30 x delta - 1.083 y=0 41 x delta - 1.083 y = 0; 40 x delta - 1.083 y = 10 41 x delta - 1.083 y = 30; 40 x delta - 1.083 y = 0