The makers of derivatives like to say their products are used mostly by people who are trying to reduce risk in the market...

If you have a home mortgage, you can be involved in derivatives already without even knowing it. These days there's a good chance yours won't be kept in one piece by the banks that lent you the money. Instead, many mortgages are shipped off and bundled into packages called mortgage-backed securities, which in turn can become raw material for other derivatives such as REMICs (real estate mortgage-investment conduits).

It's possible that your mortgage has been chopped in half -- with the principal portion sold off and bundled up into a P/O, which stands for "principal only," and the I/O, "interest only," going another way. Bond funds use I/O derivatives to add yield to their portfolios and make aggressive bets on the direction of interest rates.

Two trillion dollars in mortgages is now bound up in mortgage-backed securities, up from zero two decades ago. All told, there's a huge speculative overlay on stocks, bonds, mortgages, corn, hogs, etc., owned by regular people in the real world, which the derivative people refer to as "the underlying." These abstract concoctions are floating over the real world of stocks, bonds, corn and hogs in the same way that the island of Laputa, that fanciful domain of theorizers and stargazers, floated over real towns and villages in Gulliver's Travels.

A small snippet from an article on derivatives in a main stream rag:

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Now


guess


the


date

of


that


article


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You can probably find it on google, but I'll post the link after a few guesses.