Tavakoli: An Anecdotal Peek at the Mispricing of Counter Party and Derivatives Risk

Here is an entertaining excerpt from Janet Tavakoli, Collateralized Debt Obligations & Structured Finance, John Wiley & Sons, 2003. She reiterates the incident in the expanded second edition, Structured Finance, 2008.

This is a nice example of the mispricing of risk and the related fallacy of netting in the derivatives markets which I discussed the other day, Critical Mass: The Mispricing of