The world's next credit crunch could make 2008 look like a hiccup

Yes, a fifth. This is what is meant by interest rate risk. It's big and it's real and the banks know all about it. Their answer is to hedge the risk with interest rate derivatives. It's one of the reasons why there are so many of these contracts in existence. So that's all OK then.

Just one question though: who have they bought those derivatives from? Why, other banks of course. This creates what is known as counterparty risk... This creates a potential Catch-22 situation: the derivatives work as long as they're not needed; calling them into action renders them useless.