Explain intuitively how foreign currency options can be replicated with portfolios of borrowing and lending in the two currencies

What will be an ideal response?

Consider a call option on a foreign currency. The value of the call option will increase if the domestic currency weakens versus the foreign currency, and the value of the call option will decrease if the domestic currency strengthens versus the foreign currency. This pattern of payoffs can be replicated by borrowing domestic currency and lending foreign currency. For small units of time, the change in the exchange rate can be modeled as a binomial process with up and down increments. The precise amounts to borrow and lend then can be determined by solving a two equation system in two unknowns such that the gain on the portfolio if the domestic currency weakens and the loss on the portfolio if the domestic currency strengthens are equal to the gain and the loss that would be experienced by holding the call option.