The current market price of one share of Orange Manufacturers Inc. is $40. Assume that its stock price can either increase by 40% or decrease by 20% each year. A risk-free zero-coupon bond with one-year maturity and a face value of $1,000 has a price of $980. Assume that the yield curve is flat. Use the two-step binomial option pricing model. The contract size for all options listed below is 1 share of stock.

1. Calculate the price of a European put option with two years to expiration and strike price of $40 written on the stock of Orange Manufacturers Inc. In few words, explain how you arrived at your result. 
2. Without recalculating the binomial tree, find the price of a European call option on this stock with strike price $40 and two years to expiration. In few words, state how you arrived at your result.
3. Your broker calls you and says that the put option from part (1) is available for $2. What would you do? Is this a good deal? If there is a mispricing, then explain how would you benefit from it. Please be concise. 

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1 The price of a European put option with two years to expiration and a strike price of 40 on the st... View the full answer