Let us assume that BRK sold $40bn notional 20 year puts (over 4 indices) in 2006-2007 at an average equivalent S&P 500 level of 1400. At the prevailing swap rate and dividend yields, and implied volatility of around 24%, this would have realised premia of approximately $4.5bn, close enough to the premia actually received not to worry too much about the exact details of the transactions.[The writer then goes on to estimate the credit effect and to speculate on whether BRK uses such credit-effected prices for its own mark to market. My reading of FAS 157/159 is not only that it can but that it must.]
The undiscounted future value of this liability, ie the fair value expectation of payment in 2027, is presently around $19bn. (At the money long dated volatility has expanded to 38%; this option now is well in the money and the skewed volatility for 1400 strike is more like 33%). The present value of this liability, before the impact of credit spreads, is around $10bn using the current swap curve.
So far, so simple. But this valuation does not take account of the credit spread of the writer of the put...
The only issue I might take issue with it is that the article uses Black Scholes with vols that seem rather low (33%) to value Warren's 18 year puts. These are far out of the money forward, and I am always a bit nervous about using Black Scholes for long-dated OTM puts - my guess would be that different process-theoretic assumptions would increase the value of the position (i.e. increase Warren's loss). Kudos to Goldman though for buying these options: all that downside vol in size must make hedging their index books fun at the moment.