Questions On Mortgage Backed Securities And Credit Default Swaps

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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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