Why did the author buy the underlying and the call? Shouldn’t he be selling the underlying to hedge?
The question didn’t ask you to hedge; it asked you to replicate the payoff on the call.
Long the underlying, long a put, short a bond.
Put-call parity.
Thank you fir the reply. In the text above the question in the CFAI book, the author says that he is trying to hedge. What am I missing?
The first trade is writing a call option. The second trade is a hedge on the first; i.e., something equivalent to buying a call option.
Frankly, he’d be better off doing neither trade and saving the transaction costs. 