Derivative Accounting
In the field of risk management, derivative accounting is a very helpful tool. It allows for the risk taker to be able to assess the probability of losses and gains. When the value of something that you hold is based off of the value of a separate asset, it is possible that if the separate asset’s value were to fall dramatically, the value of what you were originally betting on can depreciate as a result of the actions of the separate asset.
For example: If you were to buy a lot of stock in tires or rubber, the value of your stock would be greatly affected by the value of oil during the same time period. Since oil is necessary in the production of both tires and rubber, the value of oil will have either a negative or positive effect on the value of your tire/ rubber stocks.
Therefore without the use of derivative accounting it would be difficult to account for any changes of tire/rubber stock value if the value of the oil needed for production had not been taken into consideration.
