Buffett has accumulated losses for Berkshire on equity derivatives since the 2008 financial crisis. The contracts, which mature starting in 2018, lose value when stock indexes decline. Berkshire’s second-quarter profit plunged 40 percent after the derivative bets on equity markets accounted for a $1.8 billion paper loss in the period.
Berkshire’s counterparties on the deals paid $4.9 billion in premiums, and Buffett arranged the contracts to minimize the collateral requirements his company could face. Liabilities tied to the equity contracts and the firm’s portfolio of credit- default swaps were about $10.5 billion at June 30. The company’s collateral provisions at that date were $173 million.
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By my calculations, Berkshire are short a staggering $280m vega marked now at an average vol in the low 30s. That is to say each 1% move in implied volatility impacts their portfolio by $280 million.
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