A step into the unknown

Some derivatives specialists speculate that many investors don’t fully understand complex instruments like first-to-default baskets and CDOs of CDOs, but that in their keenness not to be ‘left behind’, are investing in them nonetheless. Eric Burroughs reports

Wall Street has always been a cauldron of invention in finance, a source of new instruments that have reshaped the investment landscape, from mortgage-backed securities to the panoply of derivatives that are becoming integral parts of global markets. But often the invention process comes with more than a few growing pains—and occasionally big losses—for willing investors and traders.

On Wall Street today, the current focus is on credit derivatives. Products like CDOs of CDOs and first-to-default