Berkshire Hathaway 2004 Annual Report Download - page 73

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Management’s Discussion (Continued)
Foreign Currency Risk
Berkshire’ s market risks associated with changes in foreign currency exchange rates are concentrated primarily in a
portfolio of short duration foreign currency forward contracts. Generally, these contracts provide that Berkshire receive certain
foreign currencies and pay U.S. dollars at specified exchange rates and at specified future dates. Management entered into these
contracts as a partial economic hedge of the adverse effect from a decline in the value of the U.S. dollar on its net U.S. dollar-
based assets. The value of these contracts changes daily due primarily to changes in the spot exchange rates and to a lesser
degree, interest rates and time value. The average duration of the contracts is approximately six months. The aggregate notional
value of such contracts, which are spread among 12 currencies at December 31, 2004, was approximately $21.4 billion compared
to about $12.0 billion as of December 31, 2003. The fair value asset of these contracts totaled approximately $1,761 million at
December 31, 2004 and $630 million at December 31, 2003.
Berkshire monitors the currency positions daily for each currency. The following table summarizes the outstanding
foreign currency forward contracts as of December 31, 2004 and 2003 and shows the estimated changes in values of the contracts
assuming changes in the underlying exchange rates applied immediately and uniformly across all currencies. The changes in
value do not necessarily reflect the best or worst case results and therefore, actual results may differ. Dollars are in millions.
Estimated Fair Value Assuming a Hypothetical
Percentage Increase (Decrease) in the Value of
Foreign Currencies Versus the U.S. Dollar
Fair Value (20%) (10%) (1%) 1% 10% 20%
December 31, 2004............................. $1,761 $(2,614) $(475) $1,533 $1,991 $4,127 $6,669
December 31, 2003............................. 630 (1,583) (512) 512 748 1,865 3,230
Derivatives Dealer Risk
Berkshire, through General Re Securities (“GRS”), is a dealer in various types of derivative instruments in conjunction
with offering risk management products to its clients. Effective January 2002, GRS commenced the run-off of its business. It is
expected that the run-off will take several years to complete. Since January 2002, approximately 88% of GRS’ s contracts have
terminated. Accordingly, derivatives market risks from the GRS portfolio declined substantially. While GRS may incur losses
to unwind its remaining positions, market risks in the portfolio of derivatives at December 31, 2004 have declined significantly
and as of December 31, 2004 management believes that market risks are no longer significant. However, credit risks from the
potential inability of counterparties to settle amounts due to GRS remains. Management monitors counterparty credit constantly
and contracts may require such exposures to be collateralized. Uncollateralized credit exposure as of December 31, 2004 totaled
$2.0 billion. No significant credit losses have occurred to date.
Forward-Looking Statements
Investors are cautioned that certain statements contained in this document, as well as some statements by the Company
in periodic press releases and some oral statements of Company officials during presentations about the Company, are “forward-
looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking
statements include statements which are predictive in nature, which depend upon or refer to future events or conditions, which
include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” or similar expressions. In addition,
any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business
strategies or prospects, and possible future Company actions, which may be provided by management are also forward-looking
statements as defined by the Act. Forward-looking statements are based on current expectations and projections about future
events and are subject to risks, uncertainties, and assumptions about the Company, economic and market factors and the
industries in which the Company does business, among other things. These statements are not guaranties of future performance
and the Company has no specific intention to update these statements.
Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due
to a number of factors. The principal important risk factors that could cause the Company’ s actual performance and future
events and actions to differ materially from such forward-looking statements, include, but are not limited to, changes in market
prices of Berkshire’ s significant equity investees, the occurrence of one or more catastrophic events, such as an earthquake,
hurricane or an act of terrorism that causes losses insured by Berkshire’ s insurance subsidiaries, changes in insurance laws or
regulations, changes in Federal income tax laws, and changes in general economic and market factors that affect the prices of
securities or the industries in which Berkshire and its affiliates do business, especially those affecting the property and casualty
insurance industry.