In late 1992, she put $200,000 of the district's money in a mortgage derivative.

For example, the Paine Webber short-term government bond fund fell 4 percent in one day, mainly because of illiquid mortgage derivatives.

How much of the fund is in mortgage derivatives and other collateralized mortgage obligations?

These mortgage derivatives have higher risk and often higher yields, tempting fund managers.

Some mortgage derivatives are designed to be leveraged; a $1,000 instrument may have the price volatility of, say, $5,000 of normal bonds.

Mortgage securities, including arcane mortgage derivatives and leveraged structures, all can be used prudently to produce good investment returns.

And as investors shied away from mortgage derivatives, prices of those securities fell even further.

These more complex securities, often known as mortgage derivatives, are quite volatile, and some performed quite well last year.

The fund fell 15.5 percent in 1994, partly because of investments in Mexican Government paper but mostly because of mortgage derivatives.

Certain mortgage derivatives have recently proved quite illiquid, as interest rates have climbed.