Berkshire Hathaway’s Q2 earnings are out, and it looks like they beat Wall Street’s consensus estimates.
One nugget we’re always interested in is the value of his long-term derivative bets on the global stock markets. In case you forgot, Berkshire had sold put options on the S&P 500, FTSE 100, Euro Stoxx 50, and the Nikkei 225. The value of these positions increase when stocks go up and vice versa.
Given the stock market’s poor showing in Q2, it’s no surprise that the value of Berkshire’s option positions fell.
In Q2, their value fell by $1.179 billion. Of course, these are just paper losses.
From Berkshire Hathaway’s 10-Q (click to zoom):
Some details from the 10-Q:
The equity index put option contracts are European style options written on four major equity indexes. Future payments, if any, under these contracts will be required if the underlying index value is below the strike price at the contract expiration dates. We received the premiums on these contracts in full at the contract inception dates and therefore have no counterparty credit risk. We entered into no new contracts in 2011 or 2012.
At June 30, 2012, the aggregate intrinsic value (which is the undiscounted liability assuming the contracts are settled on their future expiration dates based on the June 30, 2012 index values and foreign currency exchange rates) was approximately $5.7 billion. However, these contracts may not be unilaterally terminated or fully settled before the expiration dates which occur between June 2018 and January 2026. Therefore, the ultimate amount of cash basis gains or losses on these contracts will not be determined for many years. The remaining weighted average life of all contracts was approximately 8.5 years at June 30, 2012.
In his 2002 letter to Berkshire Hathaway shareholders, Warren Buffett dubbed derivative securities as “financial weapons of mass destruction.”