Final answer:
Derivative securities, considered contingent claims, are financial instruments valued based on the performance of underlying assets. They played a significant role in the financial crisis by allowing risk to be spread among various investors, similar to money-back guarantees in the goods market that serve as an assurance strategy.
Step-by-step explanation:
Derivative securities are financial instruments that get their value from an underlying asset or event. These are often referred to as contingent claims because their outcome is contingent upon the occurrence of a predetermined event. In the context of the financial crisis involving subprime mortgages, derivatives were structured in a way that they paid out if certain events, like mortgage defaults, occurred. Financial institutions sold subprime loans and packaged them into mortgage-backed securities. The idea was for certain investors to absorb an agreed-upon percentage of losses before affecting other investors, effectively spreading the risk. These investment strategies and products like collateralized debt obligations (CDOs) played a significant role in the financial crisis due to their complexity and the way they were used to bet on the housing market.
Such derivatives were designed to reduce risk for banks holding the mortgages, acting as an insurance policy to cover losses from loan defaults. This comparison can be extended to the goods market, where sellers offer money-back guarantees to assure quality and give confidence to customers, a similar concept of mitigating risk for one party in the transaction.