WeCare Healthcare Limited is one of the leading manufacturers of call systems and provides healthcare communication and clinical workflow management solutions to over 5 000 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 $35. Over the next three months the share price will either increase by 20% (if the new product has a positive market impact) or decrease by 10% (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 three months. The strike price is $37. WeCare shares will not pay any dividends during the next three months. You can borrow money today for three months at a rate of j12 = 4% p.a.

a. Consider the replicating portfolio (that is, the investment strategy which will give identical payoffs, at the end of three months, to the call option) that involves buying h shares in WeCare today, and borrowing $B for three 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. What is the initial cost (net outlay) today of investing in the replicating portfolio? Round your answer to three decimal places.

c. What is the fair price (or premium) for the call option? Why? Round your answer to three decimal places