Berkshire Hathaway 2006 Annual Report Download - page 73

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Management’s Discussion (Continued)
Equity Price Risk (Continued)
Berkshire is also subject to equity price risk with respect to certain long duration equity index option contracts.
Berkshire’s maximum exposure with respect to such contracts was approximately $21 billion and $14 billion at
December 31, 2006 and 2005, respectively. These contracts generally expire 15 to 20 years from inception and they may not be
settled before their respective expiration dates. The contracts have been written on four major equity indexes including three that
are foreign. While Berkshire’s ultimate potential loss with respect to these contracts is directly correlated to the movement of the
underlying stock index between contract inception date and expiration, the change in fair value from current changes in the
indices do not produce a proportional change in the estimated fair value of the contracts. Other factors (such as expected future
interest rates, dividend rates and the remaining duration of the contract as well as the general market assumptions) affect the
estimates of fair value reflected in the financial statements. Thus, if the underlying indices declined 30% immediately, and
absent changes in other factors, Berkshire estimates that it could incur a non-cash pre-tax loss of approximately $2 billion from
the change in the estimated fair value of open contracts as of December 31, 2006.
Foreign Currency Risk
Market risks associated with changes in foreign currency exchange rates are currently concentrated in a portfolio of
long duration equity index option contracts on foreign equity indexes. In 2005, Berkshire also had significant exposure to
foreign currency risk from a portfolio of short duration forward contracts. The aggregate notional value of forward contracts was
approximately $1 billion as of December 31, 2006 compared to approximately $13.8 billion as of December 31, 2005.
The following table summarizes the outstanding derivatives contracts as of December 31, 2006 and 2005 with foreign
currency risk 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
scenarios and actual results may differ. Dollars are in millions.
Estimated Fair Value Assuming a Hypothetical
Fair Value Percentage Increase (Decrease) in the Value of
assets
Foreign Currencies Versus the U.S. Dollar
(liabilities) (20%) (10%) (1%) 1% 10% 20%
December 31, 2006............................. $(2,041) $(1,819) $(1,936) $(2,031) $(2,051) $(2,131) $(2,200)
December 31, 2005............................. (1,603) (3,789) (2,752) (1,724) (1,481) (305) 1,198
Commodity Price Risk
Berkshire, through its ownership of MidAmerican, is subject to commodity risk. Exposures include variations in the
price of wholesale electricity that is purchased and sold, fuel costs to generate electricity, and natural gas supply for regulated
retail gas customers. Electricity and natural gas prices are subject to wide price swings as demand responds to, among many
other items, changing weather, limited storage, transmission and transportation constraints, and lack of alternative supplies from
other areas. To mitigate a portion of the risk, MidAmerican uses derivative instruments, including forwards, futures, options,
swaps and other over-the-counter agreements, to effectively secure future supply or sell future production at fixed prices. The
settled cost of these contracts is generally recovered from customers in regulated rates. Accordingly, the net unrealized gains
and losses associated with interim price movements on such contracts are recorded as regulatory assets or liabilities. Financial
results may be negatively impacted if the costs of wholesale electricity, fuel and or natural gas are higher than what is permitted
to be recovered in rates. MidAmerican also uses futures, options and swap agreements to economically hedge gas and electric
commodity prices for physical delivery to non-regulated customers. MidAmerican does not engage in a material amount of
proprietary trading activities.
The table that follows summarizes Berkshire’s commodity risk on energy derivative contracts as of December 31, 2006
and shows the effects of a hypothetical 10% increase and a 10% decrease in forward market prices by the expected volumes for
these contracts as of that date. The selected hypothetical change does not reflect what could be considered the best or worst case
scenarios. Dollars are in millions.
Fair Value
Hypothetical Price
Change
Estimated Fair Value after
Hypothetical Change in
Price
As of December 31, 2006 $ (273) 10% increase $ (220)
10% decrease $ (326)