[kitkat]

Thanks, Blam

From Wikipedia.
“A funded credit derivative involves the protection seller (the party that assumes the credit risk) making an initial payment that is used to settle any potential credit events. (The protection buyer, however, still may be exposed to the credit risk of the protection seller itself. This is known as counterparty risk.)”

[Jimmy Valentine]

Derivitives are a useful tool for hedging interest rate risk. You give up some current yield to reduce risk going forward.

Where it pretty much always goes wrong is when the derivatives portfolio is unbalanced, as when someone decides to gamble on the market going a certain way and loads up. If the gamble is right they make a ton of money. If it goes against them it is a financial disaster.