QUESTION 4 [13 marks] WeCare Healthcare Limited is one of the leading manufacturers of call sys- tems and provides healthcare communication and clinical workflow manage- ment solutions to over 5000 facilities across five different countries. The company has recently released its new nurse call system, Angel Call, and claims that it is the most cost-effective call system in the market. The current price of one WeCare share is $20. Over the next six months the share price will either increase by 30% (if the new product has a positive market impact) or decrease by 20% (if its new product has a negative price impact). You are thinking of buying a European call option on shares of WeCare. A European call option on a WeCare share will expire at the end of six months. The strike price is $22. WeCare shares will not pay any dividends during the next six months. You can borrow money today for six months at a rate of j12 = 5% p.a. a. [6 marks] Consider the replicating portfolio (that is, the investment strategy which will give identical payoffs, at the end of six months, to the call option) that involves buying h shares in WeCare today, and borrowing $B for six months. Illustrate this model in a carefully labelled contingent cash flow diagram. Find the values of h and B (round your answers to five decimal places). b. [1 mark] What is the initial cost (net outlay) today of investing in the replicating portfolio? Round your answer to three decimal places. c. [2 marks] What is the fair price (or premium) for the call option? Why? Round your answer to three decimal places. d. [2 marks] The contingent payments method will give the same option value as the arbitrage pricing method, as long as an appropriate value is used for p (the probability of an upward price movement). Find the appropriate value of p in this case. (Round your answer to three decimal places.) e. [2 marks] Using the contingent payments method, do you expect the call option price to increase or decrease if the probability of an upward price movement increases (i.e., p increases)? Why