a derivative is a contract that purpose is to counter act (or hedge) a risk.
This is the first financial contract (like a futures contract, which is a form of an option} that has no instrument (ie stock, bond, as in options pig bellies, corn as in futures)or real commodity that it is tied to- Innstead it is tied to the perceived risk of the fluctutation of any of the above or interest rate movements.
Many of the large financial firms that dealt in credit, and bonds (interest rates are used to stimulate capital- lowering the interest rates- or slow down an inflationary economy as in raising interest rates) used hedges.
Then the hedges were bought and put into a "mutual fund format" and this funds were used to hedge portfolios as a risk - just in case things went "the other way", remember it doesn't matter which way, just the other way from which you are betting.
This is something I know
Yes one thing
There are people tha t know a great deal more about finances and financing than I do, ywt, the average literate financial followers could've and did predict the way things are going. Why did they allow the speculative splurges in the economy- first the stock market then the real estate market?
Are they greedy, yes well probably so, but is there a larger picture that would motivate even higher players to take down the structur ein place?