Wow, bad definition. Derivatives have been around for a long time. Grain futures on the CBOT are derivatives. So are options on the CBOE.
The main culprit behind the 2008 crash, Mortgage Derivatives, should never have been permitted.
Wrong again. MBS are bonds, not derivatives.
Here's a decent definition.
A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, index or security. Common underlying instruments include: bonds, commodities, currencies, interest rates, market indexes and stocks.
Futures contracts, forward contracts, options, swaps and warrants are common derivatives. A futures contract, for example, is a derivative because its value is affected by the performance of the underlying contract. Similarly, a stock option is a derivative because its value is "derived" from that of the underlying stock.
Derivatives are used for speculating and hedging purposes. Speculators seek to profit from changing prices in the underlying asset, index or security. For example, a trader may attempt to profit from an anticipated drop in an index's price by selling (or going "short") the related futures contract. Derivatives used as a hedge allow the risks associated with the underlying asset's price to be transferred between the parties involved in the contract.
For example, commodity derivatives are used by farmers and millers to provide a degree of "insurance." The farmer enters the contract to lock in an acceptable price for the commodity; the miller enters the contract to lock in a guaranteed supply of the commodity. Although both the farmer and the miller have reduced risk by hedging, both remain exposed to the risks that prices will change. For example, while the farmer locks in a specified price for the commodity, prices could rise (due to, for instance, reduced supply because of weather-related events) and the farmer will end up losing any additional income that could have been earned. Likewise, prices for the commodity could drop and the miller will have to pay more for the commodity than he otherwise would have.
Some derivatives are traded on national securities exchanges and are regulated by the U.S. Securities and Exchange Commission (SEC). Other derivatives are traded over-the-counter (OTC); these derivatives represent individually negotiated agreement between parties.
http://www.investopedia.com/ask/answers/12/derivative.asp
I’ve read those explanations. I’m sure you believe it. I do NOT.
Mortgage backed securities are a class of derivatives since the owners of these bonds derive the return from the payments on mortgages, but do not actually own the mortgages.
This subject is fraught with hyperbole. I’m afraid all this discussion is doing is confusing those reading it looking for clarity. There is no clarity, only obfuscation & hyperbole by those seeking to protect their fictional profit instruments which, of course, resulted in all the debt.
We could have a conversation about where much of the $$ went (IMHO), but I’d only piss off a bunch of people. Nobody wants to hear it. The proverbial ostrich is the order of the day and our enriching politicians are duty-bound to fix it all. /s