Introduction

Bail-outs of banks and other financial institutions in the United States and western Europe have made news headlines in recent months. Banks have found themselves with severe liquidity problems, as the values of their investment portfolios have collapsed. In many cases this has been due to their exposure to a series of derivative instruments (particularly those tied to bundled residential mortgages), used to hedge underlying risks the size of which had not been properly evaluated. Banks and insurers were exposed to plummeting market values in these derivatives, ruining their ...