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Mortgage-backed derivatives

Forget what you learned about derivatives in calculus class and see “Toxic Assets” below. Financial derivatives are contracts having values derived from the values of the underlying assets, in this case bundled mortgages. The problem is that the values of bundled mortgages are difficult to asscertain because the “bundle” generally includes a mixture of “prime” and “subprime” mortgages. The buyers of the derivatives don’t know exactly what is in their “bundle”. Derivative contracts based on credit instruments are frequently backed by “credit default swaps”.

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