Derivative Accounting Definition
A derivative is a financial contract whose value is based on an underlying asset, such as a stock, commodity, or currency. Derivatives are used to hedge risk or speculate on the future price of an underlying asset. The most common types of derivatives are futures contracts, options contracts, and swaps.
Derivative accounting is the process of recording the value of a derivative contract on a company’s balance sheet. The value of a derivative contract can change over time, so it is important to regularly update the account to reflect the current market value. This can be done using mark-to-market accounting. Mark-to-market accounting means that the value of a derivative is recorded at its current market value, regardless of the original purchase price. This ensures that the balance sheet always reflects the true value of the company’s assets and liabilities.
