Nedanstående är ett utdrag ur Warren Buffest brev till aktieägarna i Berkshire Hathaway.

We have added modestly to the “equity put” portfolio I described in last year’s report.
Some of our contracts come due in 15 years, others in 20. We must make a payment to
our counterparty at maturity if the reference index to which the put is tied is then below
what it was at the inception of the contract. Neither party can elect to settle early; it’s
only the price on the final day that counts.

To illustrate, we might sell a $1 billion 15-year put contract on the S&P 500 when that
index is at, say, 1300. If the index is at 1170 – down 10% – on the day of maturity, we would
pay $100 million. If it is above 1300, we owe nothing. For us to lose $1 billion, the index
would have to go to zero. In the meantime, the sale of the put would have delivered us a
premium – perhaps $100 million to $150 million – that we would be free to invest as we wish.

Our put contracts total $37.1 billion (at current exchange rates) and are spread among four major
indices: the S&P 500 in the U.S., the FTSE 100 in the U.K., the Euro Stoxx 50 in Europe, and the
Nikkei 225 in Japan. Our first contract comes due on September 9, 2019 and our last on January 24,
2028. We have received premiums of $4.9 billion, money we have invested. We, meanwhile, have
paid nothing, since all expiration dates are far in the future. Nonetheless, we have used Black-
Scholes valuation methods to record a yearend liability of $10 billion, an amount that will change
on every reporting date. The two financial items – this estimated loss of $10 billion minus the $4.9
billion in premiums we have received – means that we have so far reported a mark-to-market loss
of $5.1 billion from these contracts.

We endorse mark-to-market accounting. I will explain later, however, why I believe the Black-
Scholes formula, even though it is the standard for establishing the dollar liability for options,
produces strange results when the long-term variety are being valued.
One point about our contracts that is sometimes not understood: For us to lose the full $37.1 billion
we have at risk, all stocks in all four indices would have to go to zero on their various termination
dates. If, however – as an example – all indices fell 25% from their value at the inception of each
contract, and foreign-exchange rates remained as they are today, we would owe about $9 billion,
payable between 2019 and 2028. Between the inception of the contract and those dates, we would
have held the $4.9 billion premium and earned investment income on it.