Derivatives

Derivatives

derive (derives, deriving, derived): to obtain sg from sg else

derivative: sg derived, dependent upon another thing

Derivatives

Main types of derivatives: futures, options, swaps

Used for: hedging: protection against price changes

(“insurance”) speculation: buying or selling assets, hoping

to make a profit in the future (“betting”)

The subprime ciris and the credit crunch

MK, Unit 14

Think about these questions while watching the video What is a mortgage? Why do institutional investors buy Treasury Bills? Why did the Chairman of the Fed decrease the

interest rate to 1%? What was the result? Why was there an abundance of credit in the early

21st century. What is a down payment? Why was it good to buy a house on mortgage? Why do risky investments get a higher rate of return? Why didn’t lenders mind that some homeowners

defaulted on their mortgages? Prime mortgage v. sub-prime mortgage? How did mass home foreclosures affect housing

prices? And homeowners still paying their mortgage?

Video – Watch this at home too!!!

http://www.crisisofcredit.com/

Find definitions in the text

Subprime borrowers Securitization Credit crunch To write off a bad debt

When banks realize that a debt will never be repaid and stop trying to collect it

What are these? Find the corresponding term in the reading. (MK, p. 75) People who are unlikely to repay their loan. – subprime borrowers /people with a high risk of

default A security, that an investor would buy because

(s)he wants to get a regular income from people who are paying off the mortgage on their houses.

– MBS and CDO When I bought my house, it was worth $300.000,

house prices fell, it is now worth $90.000! – the debt is greater than the value of the house