I am struggling with the statement:
"Every derivative of the underlying can be viewed as a portfolio of the underlying asset and the riskless asset."
Is this based on the put-call parity?
Also I came across this statement in Hull (2006) why the stocks expected returns are not included in the option pricing formula:
"The key reason is that we are not valuing the option in absolute terms. We are calculating its value in terms of the price of the underlying stock. The probabilities of future up or down movements are already incorporated into the stock price."
Is this w.r.t. the delta hedging argument, that the replication of the riskless portfolio is in relative measures w.r.t. the long/short positions?