Berkshire Hathaway Made $US519 Million On Financial Weapons Of Mass Destruction

Berkshire Hathaway may have missed on its earnings, but its long bets on global stock markets are paying off even better in Q3 than it did in Q2.

Berkshire made $US519 million on ‘financial weapons of mass destruction‘ in Q3.

For those less colourful than Buffett himself, this is how much Berkshire made on long-term derivative bets on major global stock markets.

Back in 2008 when everything was going to the dogs, Berkshire sold put options on the S&P 500, FTSE 100, Euro Stoxx 50, and the Nikkei 225.

That means that if those indices fall below a certain price, Berkshire has to pay whoever bought the put options. When stocks go up, the value of these options increases — when stocks go down, they decrease. As Business Insider’s Sam Ro never fails to point out, these are European style options, which means they can only be exercised at maturity.
In Q2 Buffett made $US390 million off these bets.

This quarter, he made $US519 million on those bets.

Here’s what Berkshire wrote about it in its earnings report:

The equity index put option contracts are European style options written on four major equity indexes. Future payments, if any, under any given contract will be required if the underlying index value is below the strike price at the contract expiration date. We received the premiums on these contracts in full at the contract inception dates and therefore have no counterparty credit risk. We have written no new contracts since February 2008.

The aggregate intrinsic value (which is the undiscounted liability assuming the contracts are settled based on the index values and foreign currency exchange rates as of the balance sheet date) of our equity index put option contracts was approximately $US2.3 billion at September 30, 2013 and $US3.9 billion at December 31, 2012. 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 7.25 years at September 30, 2013.

Our credit default contracts were written on various indexes of non-investment grade (or “high yield”) corporate issuers, as well as investment grade corporate and state/municipal debt issuers. These contracts cover the loss in value of specified debt obligations of the issuers arising from default events, which are usually from their failure to make payments or bankruptcy. Loss amounts are subject to contract limits. We have written no new contracts since February 2009.

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