Questions On Mortgage Backed Securities And Credit Default Swaps

1220 WordsDec 1, 20165 Pages
Mortgage backed securities and credit default swaps are words we often hear in reference to the Great Recession of 2008. In this paper, I will be discussing and analyzing an analogy Tim Harford uses to discuss the probability of buying a carton of eggs with an egg having a double-yolk to what mortgage-backed securities and credit-default swaps meant and represented. In chapter 6 of the updated book, The Undercover Economist, a lady named Fiona Exon is mentioned. In early 2010 she bought half a dozen eggs and discovered all 6 of them had double yolks. According to the British Egg Information Service the chance of any given egg having two yolks is one in a thousand and for each one of the 6 eggs you keep multiplying this probability and get a probability of one in a quintillion (thousand raised to the power of 18). This was reported to the media and surprisingly more people called in to report discoveries of half a dozen double yolk eggs. This event that was known to be very rare was not really that rare. The calculation, in reality, was wrong as they had made a wrong assumption that eggs with double yolks only come in clusters, increasing the chance of seeing 6 double yolk eggs by a million billion fold with this simple assumption. So knowing that there was a really high probability of ending up with half a dozens of double yolk eggs, Fiona Exon’s friendly local egg retailer came up with a clever marketing wheeze and offered a million-pound jackpot to any customer who

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