Posts tagged 'Put options'

Buffett Derivatives: back in black

The Berkshire Hathaway annual report released on Saturday is full of information for Buffett watchers, but for those fascinated by the very large put options sold by the great Sage of Omaha, turn straight to page 47.

As of the end of 2013, and as predicted by our good friend Pablo Triana at the Esade Business School, fair value for the put liabilities of $4.7bn is now less than the $4.9bn of premium Berkshire received for writing the options.

Broadly, what that means is Warren could offer to buy back the puts at a small profit. We think it’s unlikely, but it illustrates the underlying reason for writing them in the first place – the use of billions of dollars of capital for several years. Read more

The Buffett derivative mystery gets more exotic

In the comments on our last piece on Berkshire Hathaway’s very large derivative contracts we and Professor Pablo Triana learned that Warren Buffett treats the put options he sold between 2004 and 2008 as hard-to-value Level 3 liabilities that must be marked-to-model (or myth). See page 84 in the 2009 annual report.

That helps to explain why the quarterly mark-to-market losses Berkshire reported on the contracts were not larger, given big moves in currencies and equity indices in 2008 and 2009. But in resolving one mystery it created another, because valuing large put options is typically straightforward, even if like Mr Buffett you dislike the theoretical basis for doing so, and Berkshire’s commentary and disclosure has always indicated that the contracts are of the plain vanilla variety.

This has prompted the good professor to come back with a new question: so what kind of puts did Warren Buffett sell, exactly? And in trying to answer it he has found that to Lehman Brothers at least, Berkshire appears to have sold some exotic derivatives indeed (which would raise another question, were they properly disclosed?). Read more

On actually writing the (currently implied) Bernanke put

FT Alphaville has been looking at the chances of the Federal Reserve pulling out the last weapon in its unconventional monetary arsenal: the writing of put options for the purpose of suppressing yields.

While the theory does appear extreme, a fair bit of academic research has been done on the matter. Read more

More on the literal Bernanke put

Central banks using options as a monetary policy tool — crazy, right?

But there’s history here. The Bank of Spain reportedly sold put options on the peseta to fight devaluation pressures back in the ERM crisis days of 1993, though it denied this emphatically at the time. Read more

The literal Bernanke put

Okay. This theory comes attached with a big “fringe” belief warning.

However, it is worth flagging up since it was explicitly mentioned by the Federal Reserve as a possible unconventional monetary tool back in 2003. Read more