Butch Corporation expects to receive loyalty payments totaling Y125 million in three months. It is interested in protecting these payments against a decrease in the value of the Yen. As one of hedging methods, Butch can sell Yen options with a strike a price of $0.007785 at a premium of $0.00085 per Yen. The contract size is Y6.25 million.

The spot price of the Yen is currently $0.007823, and the value for the Yen in 90 days is expected to trade in the range $0.007500 to $0.008400 with most likely price of $0.007900.

1. What kind of option contracts will Butch need to protect its receipts?

2. Draw a diagram of the profit and loss position as received by Butch at the value range. Indicate the break-even future spot price.