Butch Corporation expects to receive royalty payments totaling Y125 million in three months. It is interested in protecting these payments against an decrease in the value of the yen. As one of hedging methods, Butch can sell yen options with a strike 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 $0.008800.

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

2) Diagram the profit and loss position as perceived by Butch at the value range. Indicate also the break-even future spot price.