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Observations On The Science Of Finance In The Practice Of Finance

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Executive Summary

Merton uses deceptively simple graphs to show how risk propagated rapidly across financial networks, bringing down financial institutions. While he admits the crisis "Is very big and complicated," Merton boils a piece of it down to the use of put options, a derivative contract that's been around since the 17th century. This asset-value insurance contract, a guarantee of debt, is the basis for the credit default swaps widely adopted by financial giants in the last few years.

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