Take the Black-Scholes-Merton model with one risk free asset B and one non-dividend paying stock S as given such that under the risk neutral measure Q dSt = rStdt + StdWt, dBt = rBtdt where the parameter values are r = 0.1 and = 0.3, S0 = 100 kr and B0 = 1 kr, and Wt is a Wiener process. Consider the MH derivative with maturity date T, which is in two years time from now, and payoff function (ST ) = 3St^2

If you wanted to replicate this derivative by trading in the underlying and the risk free asset, how many stocks should your trader buy or sell for you today?

Explain if your replicating portfolio above is a static (buy and hold) portfolio or a dynamic portfolio?