 To determine the value of an option, the well-known black-school formula is used. This formula is quantitative in nature. Now to understand the intuition behind this BS model, there is an example that takes the combination of a call and a stock to eliminate the risk at all. This example also assumes that the stock prices be any of the two values. In this way, this assumption helps in eliminating the possibility that stock prices can take another value. Therefore, it helps in duplicating the call exactly. So, in our example, the model used is termed as a two-state or binomial option model. So, in our two-state model, we have an example where current stock price is $50, exercise price is $60 or $40. Now, we have a call option on this stock. The at the expiration date, the period is one year, the exercise price is $50. So, the investor's borrowing rate is 10%. Using these data, we need to determine the value of the call. Two strategies are there in this example. The strategy one is to buy the call simply. And the second strategy includes two steps. The first is to buy one-half share of the stock and at the second step, we need to borrow certain amount which in our example is $18.18 and this $18.18 is basically the present value of the amount that we need to pay along with the principal to pay off our borrowing amount. If we look at the payoffs of the two strategies, we see that in the strategy one, where we are buying the call, if the price is $50, the payoff is $10 and if the price is less than $50 or $40, the payoff is zero, means there is no exercise in this particular scenario. And in the strategy two, which is buy and borrow strategy basically, the payoff is $60, if the stock price is $60, then the payoff is $10 and in the other case, the payoff dollar is nothing. So, we see that the cash flows from the second strategy is matching of the cash flows from the first strategy, which means that the future payoff structure in the first strategy is exactly duplicated under the second strategy. This means that each strategy is ending up the investors with the net payoff of $10 if the stock price rises above $50 and if the stock price is falls below the $50, then there is zero payoff under both the strategies. So, we can say that for the traders, both these strategies are paying off an equal amount in both the scenarios. So, we have an equal amount in both the strategies for our traders. Now, the question arises that how one can know the amount of one-half as to purchase the stock to determine this portion, which is one-half in our case is we need to help, we need to take the help of a model that is termed as a delta ratio, which is the ratio between the swing of the call and the swing of the stock price. In our example, this ratio is 1 by 2 or the 50 percent of the half of the stock price. This means that as $1 swing in the call stock price gives rise a half dollar swing in the price of the call. So, as this shows again a proportional increase in the price of value of the call as to the proportional increase in the stock price. Now, while duplicating the call with the stock, it seems sensible to buy one-half of the shares of the stock instead of buying the full call as a whole. So, the risk of buying one-half of the share of the stock should be the same as the risk of buying the call as a whole. The second issue is that how to determine the amount to borrow, in which is $20 in our example. In fact, the buying one-half share of the stock brings us $30 or $20 at the expiry date which is exactly 20 more than the payoff of the $10 or the zero as it happens in our example. This means that to duplicate the call through the stock purchase, enough amount should be there so that we can borrow the two, we can borrow and we can pay off the principal amount and the interest there on. And in our example, we need to borrow $20 to pay off our debt.