Buffet and derivatives

Warren Buffet was an outspoken critic of derivatives a few years ago, calling them a financial weapon of mass destruction. Odd, coming from someone whose holding company benefits from tremendous cash flow generated by its insurance and reinsurance businesses. Now we learn that Buffet has sold a huge put option, essentially insuring the counterparty for the next 15+ years against a crash in four international stock indices.

IHT: The "long-duration equity index put contracts" are among the largest transactions that Berkshire has disclosed, and they represent the kind of risk that Buffett, the company's chief executive, and Charles Munger, the vice chairman, are turning to more often as undervalued companies get harder to find.

...He has been a critic of derivatives, obligations whose value is tied to the price of underlying assets such as stocks, debt or oil. In 2003, he called them "financial weapons of mass destruction" and since 2002 Berkshire has been unwinding the derivatives positions at the securities unit of its General Re subsidiary.

Still, Berkshire, controlled by Buffett since 1965, continues to use derivatives to take financial risks of its own. The March 7 filing said it had $801 million of derivative contract assets and $5.06 billion in liabilities as of Dec. 31. That included $35 million of assets and $1.59 billion in liabilities on equity-option contracts with a notional value of about $14.5 billion.