no. there is no free lunch. this is a zero sum game. actually adjusted for all brokerage involved in rebalancing the hedges, it is a negative sum game. one guy looses. it just might depend on the intensity of the analysis, whether this becomes obvious or not. all of course IMHO.
"Buyers of the derivatives would be entitled to billions of dollars from Omaha, Nebraska-based Berkshire if four stock indexes drop below agreed-upon levels on dates beginning in 2019." this is a complex option on a portfolio of indices. corrs start to play a role in this. this is not a too-complex option, but it ain't too simple either. and do not forget that someone has to adjust for the length of the option. so there must be dynamic hedging going on, which has a price.
BTW in these days marked to market becomes an issue even for very long term investments. do not forget that, be the option as much european as she wants, there is a current market price of such option. and if this price shows a loss, then buffet shows a loss. he is basically short VIX 20 at currently VIX at 60-80. there is no way to talk regulators out of this. many, many managers failed due to MTM, claiming that at expiration everything would be fine. which, BTW, is a nice little illusion. my personal opinion is that this is the only way to do such things: enforce MTM everywhere. all this hold to maturity BS is ... well ... BS. investors MUST be forced to only hold tiny portions of such investments.
Obviously he cant get called on it and its a good bet for him (in the end). But the people on the other side didnt buy just to hold it to expiration and as mentioned theres that little thing called margin. Noone who buys the option now is actually going to hold onto it are they.... Jsut because it cant be cashed in early doesnt mean it cant be sold...... Whoever bought them will be able to sell them off, cover them, add them to part of another position whatever and make a fortune now.
i am very suspicious to this kind of trade. usually there is an effect that fools the human eye. in this case for example it looks like an obvious trade for buffet. but if you take the current situation into account, how MTM is bringing him into trouble, things start to look different. what i am trying to say is that these products do not only have a situation on expiration date. the cost of holding capital against the daily VaR need to be take into account as well - which they often aren't. either you have a complete fool on the other side who is willing to overpay an option, or it is you who is the fool. and if you don't know the answer for sure: it's certainly you. there is no free lunch. i for myself would never ever do such trade. my thinking is like that: in this size, you don't have fools at counterparties (admittedly a conservative assumption). and whatever price for the option comes up, it is derived out of current market prices. directly. it is the outcome of all products currently traded. but it is seemingly so in your favor. and this is what i am suspicious about. when the VIX makes a spike we know that later months are reluctant to follow. when the short end in rates fluctuates widely, we know that the long end doesn't. whereever we have something traded with high liquidity with some time perspective build in, we know that this later point takes into account all the in-between-action very efficiently. and my point is that it is the same with this kind of option: what is so seemingly in your favor is an illusion. or at least partly. it is just a trade like everything else BUT it has certain disadvantages, like MTM risks, counterparty risks and so forth ... finally. over the span of a decade our imagination of what can truly happen is at risk of failing dramatically. the world CAN differ significantly from now. just look at the last eleven years. we had the LTCM, net bubble, 911 and now the assumed great recession. don't add illiquidity of your instruments on top of that. and in such products illiquidity constantly surrounds you. some swap here and there, some fx hedge (maybe the four indices where not US only) and so forth. all of a sudden you have counterparty risk with various financial institution. they won't fail all at the same time your model makes you believe ... well ... this kind of thinking is at the very heart of the current crisis.
but my true point is: WB ran a crusade against this kind of product. admittedly it is a relatively simple one, but nevertheless it IS a complex derivative and i guess he already regrets big time not resisting the temptation ...