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Author: DrtThrwingMonkey Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 214655  
Subject: Re: The index puts Date: 3/7/2013 10:25 AM
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Let me know if anybody spots an error in this summary.
Main sources are the derivative discussions in 2009 AR and 2012 AR.


I think the basic idea is correct. Bottom line, despite almost perfectly bad timing, this contract is likely to turn out to be profitable, after much hand wringing. While I often second guess Buffett's individual decisions, this is a good example of why I have 25% of my funds invested with him: he makes these high probability bets, and he just sticks it out and grinds out the profit, ignoring the handwringing and catcalls.

But since you asked, the only nit to pick that I can see would be that your numbers are end of 2012, but you occasionally mention how this will work out from now onwards, when you really mean from 2012 onwards (" if the index levels remained flat and unchanged from
now until expiration, we would see a profit booked as the time
value eroded equal to (7.5-3.9)/8 = average $450 million a year for 8 years").

But it is worth noting that markets are up a fair bit since Dec 31st. The four indexes are:
S&P 500: up 6%
FTSE 100: up 7%
Eurostoxx 50: about even
Nikkei 225: up 12%

In other words, the numbers you mention ($522m final profit) correspond not to flat markets, but to what would happen if markets fell about 6% from today's levels.

Question: how do you figure the float is $4.2b? I think you are right, since that is the number Buffett mentioned in the 2011 AR. But I don't see how we go from $6.3b premiums received between 2004 and 2008, reduced by 10% in 2010, to $4.2 today. That looks to my eye like 33% less than the original float - what am I missing?

Regards, DTM
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