Warren Buffett's Berkshire Hathaway underestimated how plunging share prices would hit its investments in derivatives, the legendary stockpicker's conglomerate admitted in letters to the Securities and Exchange Commission (SEC).

America’s top securities regulator revealed the correspondence, exchanged in June, today in regulatory filings today.

The SEC had asked Berkshire Hathaway to provide more information on how it valued billions of dollars worth of derivatives contracts connected to four equity indices around the world.

In a letter to the SEC, Mark Hamburg, the company’s chief financial officer, said that drops of up to 45 per cent in the indices last year were "in excess of our volatility inputs".

But he added that Berkshire Hathaway’s predictions of stock volatility were reasonable over the lengthy terms of the contracts.

Berkshire Hathaway owns 251 derivatives contracts, the best known of which are equity-index put options.

Mr Buffett sold the options when the four indices – the FTSE 100, the S&P500, the EuroStoxx 50 and Nikkei 225 – were peaking in 2006 and 2007. He promised to pay buyers of the contracts if the indices were lower at points between 2019 and 2028 than they were at the time the contracts were arranged.

The contracts had caused a decline in Berkshire Hathaway’s profits for six consecutive quarters before the company’s net income rebounded by 14 per cent in the second quarter of this year to $3.3 billion.

Berkshire Hathaway's derivatives losses shocked investors because Mr Buffett, called the Sage of Omaha for his clever investments, had previously derided the contracts as "weapons of financial mass destruction".

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