Volatility

Volatility is a key aspect of hedge accounting. Essentially, certain types of investments are subject directly to an investment market. Investment markets are volatile depending on risk, regulation and the attitudes of investors throughout the economy. This leads to frequent changes, sometimes drastic ones, which in turn quickly change the value of investments. This creates a problem for accountants, who must adjust the values of their accounts based on the always-changing market.

Account Combination

When accountants deal with derivative instruments, they must account for the value of the derivative instrument, the primary security on which it depends, and the changes of the market that can constantly alter them both. To simplify matters, accountants are allowed to — in the books — combine the two accounts and treat them as one, allowing market fluctuations to only change on accounts that include derivative and primary instruments. This downplays the sharp rises and falls of investment accounts.

Requirements

References

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