Buffett Ignores Changing Volatility In Put Contracts Valuations

Warren Buffett's decision to write $50 billion worth of European-style put contracts against major stock indices between 2004 and 2008 for $4.9 billion in premiums has previously drawn attention for the strange way they seem to have been priced, but now it seems that Berkshire Hathaway has stood by pre-crisis volatility predictions that no longer make much sense, which make the company’s exposure look smaller than it probably is.

Berkshire Hathaway stuck by initial volatility estimates

“Berkshire has opted for a peculiar way of dealing with volatility. The firm is using the Black-Scholes volatility parameter as a static forecast...