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1.5 Uses of derivatives
Publication date: 31 Mar 2024
us Derivatives & hedging guide
Reporting entities commonly use derivatives to manage their exposure to various risks, such as interest rate risk, foreign exchange risk, price risk, and credit risk. They may enter into derivatives to entirely or partially offset risk exposures produced in their operations or other contractual arrangements. See DH 5 for information on hedge accounting, a common risk management activity.
Some reporting entities may use derivatives to acquire risk or speculate on future price changes of an underlying asset. Provided the value of the underlying asset moves as expected, the reporting entity can profit from price changes without having to invest in the underlying asset itself. Reporting entities can also enter into a combination of derivative transactions to take advantage of price differences between two or more markets.
How an entity uses a derivative can affect how it accounts for the instrument. Refer to DH 2.4 for information on the fundamentals of accounting for derivatives.
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