The rarting agencies are "shocked, shocked, shocked" to find out that Berkshire Hathaway has derivatives exposure, by far the largest of which is $37.1 billion of "puts," and are scrambling to lower their ratings on the company. But for a variety of reasons it's really a non-event.
There are several things about the exposure that make it (almost) non-dangerous. The first is that it kicks in only on distant dates, with most in the year 2028, and the earliest batch in 2019. The second caveat, a very important one, is that they are "European" puts, which can be execised only on their due dates, not before. Interim price moves have no bearing, unlike American puts, which can be exercised at any time. "Volatility" raises the value/exposure of American puts far more than they do to their European counterparts.
The third thing is that Berkshire Hathaway received $4.9 billion of premiums. How much might they be worth in twenty years (to cover the later liabilities)? Warren Buffett has hypothesized (in 2002) a forward going investment return of 7% a year. At that rate, the $4.9 billion will double in ten years, quadruple in 20, for a value of $19.6 billion.
The last thing is that $37.1 billion is a maximum exposure, if all the indexes in question go to zero. A more reasonable "worst case" is that they will go to half, or $18.6 billion. That is an amount that the hypothetical $19.6 billion can cover. The main reason it won't do so is because some of the $4.9 billion will accrete to only a pro rata share of $9.8 billion for the first tranche that is ten, rather than 20, years down the line. So Berkshire's probable exposure is some fractional share of ($9.8 billlion-$18.6 billion) or some fraction of $9.2 billion. We're talking about low billions here, which Berkshire can more than amply cover with its fortress like balance sheet.
Put another way, if we discount $37.1 billion back twenty years and divide by 4, the maximum exposure is $9.3 billion in net present value terms. That's not counting the likelihood of a less than 100% loss, and in any event, it's offset by $.4.9 billion of premiums, leaving a maximum exposure of $4.4 billion before "recoveries."... to market" accounting does not take into account these present value calculations, but fully books losses immediately, even though they can't be realized until much later.
To most people, $37.1 billion of exposure sounds like a lot, even for Berkshire. But $37.1 billion (mostly) 20 years in the future, offset by the likely future value of premiums, isn't a whole lot (for Berkshire). It's even less when the likely exposure is well under $37.1 billion.
Disclosure: Long BRK/A BRK/B