Chapter 8 Securitization and the Credit Crisis of 2007

Derivatives such as forwards, futures, swaps, and options are concerned with transferring risk from one entity in the economy to another. The first seven chapters of this book have focused on forwards, futures, and swaps. Before moving on to discuss options, we consider another important way of transferring risk in the economy: securitization.

Securitization is of particular interest because of its role in the credit crisis (sometimes referred to as the “credit crunch”) that started in 2007. The crisis had its origins in financial products created from mortgages in the United States, but rapidly spread from the United States to other countries and from financial markets to the real economy. ...

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