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Contagion: Chain Reactions and the CoCo Powder Keg
Many Happy Returns
What Is a Derivative?
A derivative is when instead of buying a thing like a stock or a bond, you buy a contract that gives you a payoff. So for example, the call option has a kind of hockey stick payoff where if it's below a certain price, there's no increase in the price of the derivative. But then if you go above the strike price, the price goes up one for one. It's these non-linear payoffs, which in turn have leverage built into them. The options can blow up and the derivatives can blow up because of the leverage.
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