Monday, March 14, 2011

Derivatives, as Accused by Warren Buffett -

Derivatives, as Accused by Warren Buffett -
Two interesting look-ins for class:

"Mr. Buffett defended Berkshire Hathaway’s use of derivatives, arguing that the company maintains a limited amount. At the time of the interview, the company had only about 250 derivative contracts. (It’s now down to 203.) “I want to know every contract, and I can do that with the way we’ve done it. But I can’t do it with 23,000 that a bunch of traders are putting on.”
"Many companies, as diverse as Coca-Cola and Burlington Northern, argue that they employ derivatives to hedge their risk. The United States-based Coca-Cola tries to protect against fluctuations in currencies since it does business around the world. Burlington North, the railroad giant, uses the investments to limit the impact of fuel prices.

Mr. Buffett, who has interests in both companies, claimed there was another agenda. “The reason many of them do it is that they want to smooth earnings,” he said, referring to the idea of trying to make quarterly numbers less volatile. “And I’m not saying there’s anything wrong with that, but that is the motivation.”

No comments: