Abstract
One of the swear words attached to the financial crisis is ‘derivatives’ — a term applied to a wide array of new financial instruments often identified by their acronyms — asset-backed securities (ABSs), mortgage-backed securities (MBSs), collateralized mortgage obligations (CMOs), collateralized debt obligations (CDOs), private mortgage insurance (PMI), and credit default swaps (CDSs). These instruments are designed by financial engineers, who often have been trained as applied mathematicians; these ‘quants’ develop the features of these instruments and often have been involved in their pricing.
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