Berkshire Hathaway 2008 results

Berkshire Hathaway's has $37.1B equity put option contracts in sell position. The company loss $6.8B in 2008 because of this contact. One may concern if the equity market keep dropping, what will be the impact to BRK?

Here is what Buffett said in 2008 annual report:

• 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.

I did a worse case scenario based on the following assumption:

• Assume 10% return per year on $4.9B (given that BRK had entered into bond / preferred shares contract with a return of 10-15% per year during 2008 & early 2009)

BRK will loss $$ only if S&P 500 (or the world wide equity market) did not bound back above 461 points in 10-15 years time.
Which is 69% dropped from 1,576 (historical peak) and 35% dropped from 712 (today).

Will this happen? May be. But what is the possibility of this happen?
I think it is unlikely!!

If S&P 500 rise above 1,100 @ 2019, BRK will earn a pre tax income between $11B to 21B on this contract.

	10%	max $37B			worse case
	Interest inc	G/L	Total gain		S&P 500
peak					1,576
2007	245		245		1,069
2008	515	(6,800)	(6,286)		903
2009	566	(14,894)	(14,328)		625
2010	623	9,543	10,165		719
2011	685	2,495	3,180		791
2012	753	2,196	2,949		854
2013	829	1,482	2,311		897
2014	911	(1,556)	(645)		852
2015	1,003	(2,957)	(1,954)		767
2016	1,103	(3,991)	(2,888)		652
2017	1,213	(2,714)	(1,501)		573
2018	1,334	(1,990)	(656)		516
2019	1,468	(896)	572		490
2020	1,615	(851)	764		466
2021	1,776	(162)	1,615		461
2022	1,954	-	1,954		461
2023	2,149		2,149		461
2024	2,364		2,364		461
Tol	21,105	(21,095)	10		461