Derivative financial instrument– a contract (agreement), the parties to which have the rights/obligations to perform actions regarding the underlying asset of the contract: buy/sell, accept/deliver. Other accepted names for derivative financial instruments (hereinafter referred to as derivatives): derivative securities, futures contracts/agreements or derivatives.
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1. FEATURES OF PFI
1.1. Appeal
The main feature of derivatives, which distinguishes it from other contracts for the sale and purchase of securities or other goods, is the possibility of free circulation (assignment). This is achieved through standardization/unification of the contract and exchange trading of derivatives.
The exception is the forward, the oldest derivatives contract, the ancestor of the entire modern line of derivatives. The rights or obligations under a forward can be sold (assigned) only with the consent of the second party, which will require the conclusion of a separate agreement - an assignment agreement, in accordance with national or international law.
1.2. Deadlines
Another feature of derivatives is their urgency. Hence the name – fixed-term contract. Transfer of the underlying asset and (possibly) payment for it occurs at some specified date in the future or during a specified period. For futures and options, this is called the expiration date.
In this case, the type, volume/quantity and price of the underlying asset are fixed on the date of conclusion of the contract.
1.3. Pricing
A derivative combines two values that are closely related to each other - the price of the underlying asset and, in fact, the price of the futures contract. Since exchange-traded derivatives can be traded, bought and sold as separate instruments, they have their own price dynamics, which are closely related to the dynamics of the value of the underlying asset. The price movements of a derivative and its underlying asset, in general, are not identical, nor are the absolute values of such prices themselves.
However, there is some degree of correlation between them. For example, the Black-Scholes model is widely used in options, according to which the value of an option is determined by the expected volatility (price variability) of its underlying asset. The futures price on the expiration date is equal to the price (average price) of its underlying asset on that date.
1.4. Purposes of using derivatives
Buying (or selling) a derivative usually has two purposes: hedging or speculation.
In the first case, the owner of the derivative hedges the price of the underlying asset for future delivery. Thus, the buyer of a currency under a forward contract fixes the dollar/ruble exchange rate on the date of conclusion of the contract and insures himself against an increase in the dollar/ruble exchange rate.
The speculator makes profit from price fluctuations of a futures contract, like any other instrument, security, currency, etc. When derivatives quotes increase, he opens long positions, and when they decrease, short positions.
There are more complex and subtle techniques that use a combination of forward and spot instruments. An example is market-neutral strategies for trading the spread between a derivative and its underlying. A common pair is a stock index and index futures. An index portfolio is used as a stock index - a portfolio of shares included in the index basket in the required proportions.
1.5. The relationship between the derivatives market and the underlying asset market
The volumes of the derivatives market and the underlying asset market are not the same. The volume of futures, options and forwards on shares of Company A is not at all equal to its market capitalization (the number of shares multiplied by their exchange value). It may be lower, but it may also be significantly higher.
It would seem that this fact inevitably leads to the failure of the implementation of PFI. This would indeed be the case if there was an obligation to deliver the underlying asset when the derivative was exercised. In the case where the expiration of a derivatives contract does not require physical delivery, securing the obligations of derivatives market participants is achieved by introducing a guarantee collateral.
2. UNDERLYING ASSET
The underlying asset of a derivatives contract can be any goods, securities, stock indices, currencies, interest rates, as well as the derivatives themselves. For example, an option on futures.
Modern practice also offers more exotic types of underlying assets. Including the inflation rate and other statistical data, meteorological parameters (temperature, wind force, etc.), physicochemical and biological characteristics of the environment. Fundamentally, the underlying asset can be any value that changes over time according to objective laws.
The key condition of a derivatives contract (primarily forward and futures) is whether physical delivery of the underlying asset occurs. If yes, such a contract is defined as delivery; otherwise, as non-delivery or settlement. The result of the settlement PFI will be monetary settlements between the participants.
3. CLASSIFICATION OF PFI
In addition to dividing into delivery and settlement, futures contracts can be systematized according to the following criteria.
3.1. Exchange-traded and non-exchange derivatives
At the place of application.
A classic example of an over-the-counter derivatives contract is a forward. A forward contract is a non-unified and non-standardized contract that is not the subject of exchange trading.
Another thing is futures and options. These instruments, to an overwhelming extent, are traded only on the stock exchange and were created specifically for it.
3.2. Commodity and non-commodity derivatives
By type of underlying asset.
The oldest derivative derivative, the forward, grew out of the needs of the traditional commodity market. Agricultural products, metals, energy resources, everything that is directly related to the real sector of the economy forms fixed-term commodity contracts. Despite this content, they may well be of a calculated nature and act as instruments of hedging and speculation.
Derivatives in the financial segment have a non-commodity, financial “filling”. Securities, currencies (currency pairs), interest rates, economic indicators, insurance against default, stock indices and much more, as well as their various combinations.
4. MAIN TYPES OF PFI
4.1. Forward
Short name of the forward contract.
An agreement between parties providing for delivery of an underlying asset at a future date (for a deliverable forward). The result of a non-deliverable forward will be monetary settlements between the parties based on the market price of the underlying asset on the date of execution of the forward contract.
The main advantage of the forward, which determined its popularity and gave impetus to the development of the entire range of futures instruments, is the fixation of the price on the date of conclusion of the contract. Thus, the buyer of a forward contract is insured against an increase in the value of the underlying asset, and the seller is insured against its fall. The price of the underlying asset in a forward contract is called the forward price or forward rate (for a foreign exchange forward).
Forward is an over-the-counter derivative.
Not to be confused with a forward transaction on the stock exchange, namely, an exchange transaction with settlements from 3 days (T+3)
The forward is primarily of a commodity nature. The underlying asset of a contract is determined by its type (certification) and number of units (volume).
The forward is not standardized and is binding on both parties. Changing the terms of a forward contract, as well as assigning rights of claim under it, is achieved with the consent of both parties.
4.2. Futures
Short name of the futures contract.
A standardized and unified forward form for exchange trading. Futures are exclusively exchange-traded derivatives. Both settlement and delivery contracts are available. Hedgers and speculators prefer settlement (non-deliverable) futures.
Futures are a more flexible derivative in terms of the type of underlying asset. The widest range of commodity and non-commodity items, from oil and gold to indices and interest rates.
The main characteristics of the instrument and the general principles of futures trading will be discussed in detail in a separate article in the derivatives category.
Here we will limit ourselves to a simple listing of the key futures parameters:
4.3. Option
An option contract (Latin optio - choice, desire, discretion) gives its owner the right to buy or sell the underlying asset at the price specified in the contract and on a certain date (within a certain period). The price mentioned is called the strike price, or strike for short.
The buyer (owner) of the option can exercise his right, or he can abstain. Everything depends on the market situation. The seller of the option (the person who wrote the contract) is obliged to sell or buy the underlying asset at the request of the owner of the option contract.
The option has a value called a premium. The buyer pays a premium when purchasing the contract, this is his expense. For the option seller, the premium is income.
An option is primarily an exchange instrument. The premium is its stock quote. There are also non-exchange non-standardized options. They are resorted to by large players who are not satisfied with the proposed execution dates of exchange options. Outside the exchange, any expiration date is built into the option contract.
Globally, all options are classified according to two criteria:
1. Option type.
Buy option, call option, call option or just call. Gives the right to purchase the underlying asset.
Sell option, put option, put option or just put. Gives the right to sell the underlying asset.
2. Type of option.
An American option can be presented for exercise/redemption on any day before its expiration date.
A European option is exercised only on a date clearly specified in the option contract.
Options and the simplest option strategies will be discussed in more detail in the profile material of the derivatives category.
Currency swap, currency swap.
Two opposite conversion transactions for the same base amount with different value dates. For example, selling dollars for rubles with a buyback at a higher price. The redemption cost is calculated based on the swap rate.
Interest rate swap, IRS.
Pension funds for interest rate exchange. One party pays the other a fixed rate on the base amount. The second party transfers income to the first, based on a floating rate for the same amount. So the payment at a fixed rate is changed to a payment at a floating rate.
Credit default swap, credit default swap, CDS.
Acts as insurance for the owner of a debt obligation (loan, bond, bill). If certain events occur that lead to the debtor's default, the seller (issuer) of the CDS is obliged to repay the debt for him. The list of such events, called “credit” events, is specified in the terms of the credit default swap. Similar to an option, the price of a CDS is called its premium.
4.5. Contract for difference
Makes it possible to receive income from price fluctuations in the market of the underlying asset (securities, currency, other goods) without purchasing it.
A participant in the CFD market deposits the required margin and opens long or short positions in the selected instrument. Profit/loss is accrued/debited from the trader's GO.
The CFD scheme has become the most widely used to attract domestic investors to international markets (stock and foreign exchange).
4.6. Warrant
From English warrant (warrant), warranty (guarantee).
A futures contract gives its owner the right to purchase securities (usually shares) at the price specified in the warrant. It is used primarily during underwriting and initial subscription to shares (IPO). Can be used as insurance or even a bonus to attract investors.
For example, the price of shares in a warrant is set at par or even slightly lower. Issuers of securities (sellers of warrants) will reduce their possible losses due to the price of the warrant. A kind of option to purchase a block of shares.
The term “issuer option”, which is similar in meaning, has been established in domestic legislation (Federal Law “On the Securities Market” dated April 22, 1996 No. 39-FZ). At the same time, the legislator interprets the issuer's option as a security, and not as a derivative.
4.7. Depository receipt
Introduced to facilitate the entry of foreign investors into national stock markets. A depository receipt (DR) is issued by the depository organization of the investor's state, in whose account the shares of the foreign issuer are deposited. Thus, the owner of the DR has the most important rights to the shares that are the subject of the DR without leaving his jurisdiction. The trend of the DR exactly repeats the trend of the security itself; the owner of the DR will receive dividends when they are accrued.
Depending on the circulation markets, three types of DR appear in Russian sources:
- ADR, ADR – American Depositary Receipts, for the US stock market.
- GDR, GDR – global DR, for other foreign markets, primarily European.
- RDR – Russian depositary receipts.
According to Law 39-FZ, RDR has the status of a security (not derivative financial institution).
5. SELECTED FACTS FROM THE HISTORY OF PFI
Prototypes of fixed-term contracts arose in Babylon several hundred years BC.
Holland in the 1630s was swept by the legendary boom of tulip mania. The first documented crisis with signs of a financial bubble. Multimillion-dollar, in modern dollars and pounds, turnover of trades in flower bulbs on special tulip exchanges (boards) would be impossible without fixed-term contracts. “Tulip” futures and options were issued in the form of notarized guarantees. Actually, the main trading shaft passed through receipts, and not through bulbs. And the market crash of early 1637 was particularly significant in options and futures.
Dynamics of the futures price index (green) and options (red)
for tulip bulbs in 1635-37.
In Japan in the mid-18th century, the role of exchange futures for rice was successfully performed by rice coupons. Trading in “rice” derivatives was brisk on the largest rice exchanges in the Land of the Rising Sun - Dojima in Osaka and Kuramae in Edo (modern Tokyo). The Japanese were so successful in the derivatives market that they became the founder of one of the popular methods of technical analysis - constructing and studying stock charts in the form of Japanese candlesticks. The authorship of candlestick analysis is attributed to
Derivative(“derived” from English) derivative”) is a derivative financial instrument from an underlying asset (an underlying commodity). The underlying asset can be any product or service.
In other words, a derivative is a financial contract between parties that is based on the future value of an underlying asset. They have existed on the market since ancient times; derivatives were concluded for tulips, rice, etc.
It turns out that the owner of the derivative enters into a contract to purchase the main product in the future, without having to think about warehousing and delivery. And this contract can already be speculated on.
The purpose of concluding a contract is to make a profit by changing the price of an asset. The number of derivatives may exceed the number of assets. Derivatives are used for:
- (risk reduction);
- Speculation.
Renowned financier Warren Buffett called derivatives “financial weapons of mass destruction” in 2002. Financial analysts directly link the latest global financial crisis to market speculation. The value of derivatives significantly exceeded the value of the underlying assets.
The most common derivatives:
- Futures;
- Forward;
- Option.
Futures contracts(“future” from English.” future”) are agreements to buy/sell an underlying asset at a price agreed upon at the time the contract is concluded. The purchase/sale itself occurs at a certain point in the future. Futures work only on exchanges; a standard contract is concluded.
Forward(“forward” from English) forward”) is the over-the-counter equivalent of a futures contract, which is a non-standard contract. The terms of purchase/sale are determined only between the buyer and seller.
Option(“choice” from English) option”) provides the buyer with the right to carry out a purchase/sale transaction, subject to the payment of remuneration to the seller of the option. Under an option contract, the buyer has the right to fulfill his obligations. The seller is obliged to complete the transaction according to the agreed terms.
All contracts involve delivery of the underlying asset at a future date on the terms specified in the contract.
You can understand what derivatives are using the example of buying a car:
- The car brand has been selected at the dealer's showroom. Next, the color of the car, engine power, additional equipment are determined and the purchase price is fixed. A deposit is made and a forward contract is concluded to purchase the car in 3 months. Regardless of market price fluctuations, you have acquired the right and obligation to buy a car at a previously agreed upon price.
- You like a particular car, but you won’t be able to buy it until a week later. You can enter into an option agreement with the supplier: pay him $100 and ask him not to sell the car until the end of the week and not to raise the price on it. You acquire the right, but not the obligation, to buy the car at the stated price. You can refuse the purchase if you find a cheaper option in another salon.
There are certain risks and rewards for both options. Risks.
The prices or terms of which are based on the corresponding parameters of another financial instrument, which will be the underlying one. Typically, the purpose of purchasing a derivative is not to obtain the underlying asset, but to profit from changes in its price. A distinctive feature of derivatives is that their quantity does not necessarily coincide with the quantity of the underlying instrument. Issuers of the underlying asset generally have nothing to do with the issuance of derivatives. For example, the total number of CFD contracts for shares of a company can be several times greater than the number of issued shares, while this joint stock company itself does not issue or trade derivatives on its shares.
The derivative has the following characteristics:
- its value changes in response to a change in an interest rate, the price of a commodity or security, an exchange rate, an index of prices or rates, a credit rating or credit index, or another variable (sometimes called an “underlying”);
- its acquisition requires a small initial investment compared to other instruments, the prices of which react in a similar way to changes in market conditions;
- calculations for it are carried out in the future.
Essentially, a derivative is an agreement between two parties in which they assume the obligation or right to transfer a specified asset or sum of money on or before a specified date at an agreed upon price.
There are some other approaches to defining a derivative financial instrument. According to these definitions, the indicator of urgency is optional - it is sufficient only that the instrument is based on another financial instrument. There is also an approach according to which only one that is expected to generate income from price differences can be considered a derivative instrument and is not intended to use this instrument for the delivery of a commodity or other underlying asset.
Most derivative financial instruments, in accordance with Russian legislation, are not recognized as securities, as interpreted in the Federal Law “On the Securities Market”. The exception is the issuer option. However, there is such a term as derivative security. This concept includes instruments based on securities (forward contract on a bond, option on a share, depository receipt).
Features of derivative instruments
- Derivative financial instruments are based on other financial instruments: currencies, securities. There are derivatives on other derivatives, such as an option on a futures contract.
- As a rule, derivatives are used not for the purpose of buying and selling the underlying asset, but for the purpose of generating income from differences in prices.
- The derivatives market is directly related to the securities market. These markets are built on the same principles, pricing in these markets follows the same laws and, as a rule, the same participants trade on them.
Examples of derivatives
Literature
- John C. Hull Options, Futures and Other Derivatives. - 6th ed. - M.: “Williams”, 2007. - P. 1056. - ISBN 0-13-149908-4
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See what “Derivatives” are in other dictionaries:
Derivatives- Derivatives, see Derivatives...
Derivatives- - see Derivatives... Economic and mathematical dictionary
Derivative financial instruments: futures, forwards, options, swaps, used in transactions not directly related to the purchase and sale of tangible or financial assets. They became widespread at the end of the 20th century. Used for… … Dictionary of business terms
Mn. Secondary or derivative securities in the financial market. Ephraim's explanatory dictionary. T. F. Efremova. 2000... Modern explanatory dictionary of the Russian language by Efremova
derivatives- Derivatives, they are also secondary securities. The principle of their operation is to bet on someone else's bet, to play on someone else's game. However, not even all financiers understand the principle of operation of D. The fact that they appeared in news reports and ordinary conversations is the same... ... Dictionary 2007
FINANCIAL DERIVATIVES- derivative financial instruments, which are based on other, simpler financial instruments. Cost of D.f. depends on the value of the underlying instrument traded on the cash market (for example, shares or bonds). K D.f... Foreign economic explanatory dictionary
See CREDIT DERIVATIVES Glossary of business terms. Akademik.ru. 2001... Dictionary of business terms
Derivative financial instruments, derivatives- DERIVATIVES Futures contracts, options and swaps that are derivatives of actual transactions in securities, currencies or commodities. There are also “exotic” derivatives, the contract terms of which are complex and unusual... Dictionary-reference book on economics
Derivative- (Derivative) A derivative is a security based on one or more underlying assets. A derivative as a derivative financial instrument, types and classification of securities, the derivatives market in the world and Russia Contents >>>>>>> ... Investor Encyclopedia
The derivative itself is a contract between two or more parties. The value of a derivative is determined by fluctuations in the value of the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indices.
Derivative securities (another name for derivatives) are traded on exchanges or over-the-counter (OTC) markets.
More about derivatives
Derivatives were originally used to provide a balanced exchange rate between goods traded internationally, as due to differences in national currency rates, international traders needed a system to account for these differences. Today, derivatives are based on a wide variety of transactions and have many uses. There are even derivatives based on weather data such as rainfall or the number of sunny days in a particular region.
Derivatives are a whole category of securities, so they have a variety of functions and ways of using them. Certain types of derivatives can be used to hedge the risk of purchasing assets. Derivatives can also be used to make speculative bets on the future price of an asset or to circumvent currency restrictions. For example, a European investor purchasing shares of a US company on a US exchange (using US dollars) would be exposed to exchange rate risk while holding the shares. To hedge this risk, an investor can purchase currency futures to lock in the exchange rate for a future sale of shares and conversion of the currency back into euros. In addition, many derivatives are characterized by high leverage.
Common forms of derivatives
Another form of derivative is a mortgage-backed security, which is a bond, or debt obligation, whose collateral is guaranteed by a mortgage or a portfolio of mortgages that typically insure against any default.
Limitation of derivative financial instruments
As mentioned above, a derivative is a broad category of securities, so their use in financial decisions varies depending on the type of derivative in question. Generally speaking, the key to making a profitable investment is understanding the risks associated with derivatives. The use of derivatives only makes sense when the investor fully understands the risks and understands the impact of the investment within the portfolio strategy.
Today, investors have a fairly wide range of financial instruments and opportunities at their disposal, both to make money on stocks and securities, and on derivative instruments (derivatives).
The derivatives market is one of the main and most active segments of the modern financial system. However, most novice investors have very little understanding of what derivatives are. Accordingly, the opportunities that open up for investors thanks to such instruments remain unclaimed. Or, on the contrary, investors take a thoughtless risk, having little idea of the risks of this instrument.
The essence of a derivative as a financial instrument
To understand what derivatives are and why they are needed, first of all, you need to understand that they are, in simple words, derivative financial instruments. That is, there is an asset that is considered underlying. According to it, a bilateral agreement is concluded, the participants of which undertake to complete the transaction on pre-established conditions.
Despite the complexity of the wording, such agreements are often found in our everyday life. By the way, the simplest example is purchasing a car at a car dealership according to the “made to order” scheme. In this case, the buyer enters into an agreement with the dealership for the supply of a car of a specific model, in a specific configuration and at a specific fixed price.
Such an agreement is a simple derivative, in which the asset is the ordered car. Thanks to the concluded contract, the buyer is protected from changes in value, which may increase by the agreed date of purchase. The seller also receives certain guarantees - a rare car, which he purchases from the manufacturer, will definitely be purchased and will not “hang” in his salon as “dead weight”.
The modern derivatives system began to take shape in the 30s of the 19th century. Financial derivatives are a product of the 20th century. The starting point is considered to be 1972, when the international currency market that we know today finally took shape. If previously only real goods were used in such transactions, then with the advent and development of financial derivatives, it became possible to conclude contracts in relation to currencies, securities and other financial instruments, up to the debt obligations of individual companies and entire states.
The Russian derivatives market was formed in the 90s of the last century. Despite the fact that this segment is actively developing, it is characterized by the problems of all young markets. The main feature is the lack of competent personnel, especially among ordinary market players. Not all participants know for sure what derivatives are and their properties. All this leaves an imprint on the development of the market.
Types of derivatives
Classification helps to fully understand what a derivative is and why it is needed. It can be built according to two main features. First is the type of underlying asset:
- Real goods: gold, oil, wheat, etc.
- Securities: shares, bonds, bills and much more.
- Currency.
- Indexes.
- Statistics data, for example, key rates, inflation rates, etc.
The second classifying feature is the type of pending transaction. From this point of view, there are 4 main varieties:
- Forward.
- Futures.
- Optional.
- Swap.
A forward contract is a transaction in which the participants agree to deliver an asset of a certain quality and in a specific quantity within a specified period. The underlying asset in forward contracts is real goods, the rate of which is agreed upon in advance. The above example of a car dealership falls into this category. This example really captures the essence in simple language, without fancy words.
Futures is an agreement under which a transaction must take place at a specific point in time at the market price on the date of execution of the contract. That is, if in a forward contract the cost is fixed, then in the case of a futures contract it can change depending on market conditions. The only obligatory condition of futures contracts is that the commodity will be sold/purchased at a specific point in time.
An option is the right, but not the obligation, to purchase or sell an asset at a fixed price before a specific date. That is, if the holder of shares of a certain enterprise announces his desire to sell them at a certain price, then the person interested in the purchase can enter into an option contact with the seller. According to its condition, the potential buyer transfers a certain amount of money to the seller, and he undertakes to sell the shares to the buyer at a set price.
However, such obligations of the seller remain valid only until the expiration of the period specified in the contract. If by the specified date the buyer has not completed the transaction, then the premium he paid goes to the seller, who receives the right to sell the shares to anyone.
A swap is a double financial transaction in which the underlying asset is simultaneously purchased and sold under different conditions. At its core, a swap is a speculative instrument and the only purpose of such actions is to profit from the difference in the price of contracts.
Why are derivatives needed?
In the modern financial system, derivatives and their properties are used in two ways. On the one hand, this is an excellent tool for hedging, that is, insuring risks that invariably arise when concluding long-term financial obligations. Moreover, they are most often used for speculative earnings.
How forward transactions are used has already been discussed above. This is a classic option for hedging price risk. However, in the modern commodity market, futures transactions have become more widespread. 
The use of futures allows the seller to insure against financial losses that may occur if the underlying asset he owns is unclaimed. By concluding a futures contract, the owner of an asset can be firmly confident that he will definitely sell it, thereby receiving real money at his disposal.
For the buyer, the value of a futures contact is that he receives a guarantee for the acquisition of an asset that he needs to implement his plans. For example, a manufacturing enterprise needs a stable supply of raw materials, since stopping the technological cycle threatens serious losses. Therefore, it is profitable for management to buy futures for the supply of a specific amount of raw materials by a certain date, thereby ensuring the uninterrupted operation of the enterprise.
Options are more often used to hedge risks arising from trading in the stock market. To understand the mechanism of their action, let's consider a small example. Suppose there is a package of securities that is being sold at the current price of 100 rubles. A certain investor, having analyzed the prospects of the package, came to the conclusion that in the next three months its price should increase by 50% and amount to 150 rubles. However, there is a high probability of financial losses if the forecast does not come true.
In this situation, the investor enters into an option contract with the holder of the package for a period of three months to sell the asset at a price of 100 rubles. For this right, he pays the owner of the securities 10 rubles. Now, if the forecast turns out to be correct and in the near future the share price rises to 150 rubles, the investor will be able to buy a package of securities for 100 rubles at any time before the expiration of the option contract and make a profit of 50 rubles.
If, however, an error was made during the analysis and the price of the package did not increase, but, on the contrary, decreased to 60 rubles, then the buyer of the option has the right to refuse the purchase. In this case, he will suffer a loss of 10 rubles, whereas in the absence of hedging the risk through the option, his loss would be 40 rubles. 
The owner of securities can act in a similar way, concluding options for the right to sell an asset at its current value within a certain period. Third, fourth and fifth parties may be involved in the process - the same option can be resold to other market participants, who can dispose of it as an ordinary security.
Similar properties of forwards, futures and options are actively used in speculative games. In the twentieth century, the market began to rapidly become saturated with derivatives. As a result, its volume many times exceeded the market for real goods. This, according to many analysts, was the cause of the last crisis that gripped the global financial system at the beginning of this century.
Therefore, novice investors need to have a good understanding of what derivatives are and how to work with them correctly. Otherwise, illiterate use of such tools can result in serious losses.
