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Credit derivatives, such as credit default swaps, can amplify financial crises by allowing institutions to take on excessive risk without fully understanding their exposure. During the 2008 financial crisis, these instruments contributed to the collapse of major financial institutions, as they were often used to insure against defaults on mortgage-backed securities. The lack of transparency and regulation in the credit derivatives market further exacerbated the crisis, leading to a loss of investor confidence and a systemic downturn in the global economy. Ultimately, their misuse highlighted the interconnectedness of global financial systems and the potential for localized failures to trigger widespread turmoil.

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2mo ago

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