What is a Wasting Asset?
A wasting asset is a property or security that has a limited life and loses value over its life.
How Does a Wasting Asset Work?
Assets have a useful life, usually based on the period of time that they have productive capacity. As the asset is used, it depreciates, eventually having little or no residual value. During the period of depreciation, the asset is called a "wasting asset." For example, natural resources, such as gas and timber, are wasting assets that eventually are used and then have no remaining value.
In the capital markets, this can also be true. Some securities have a deadline for their purchase or sale. In some cases, the security loses value as it gets closer to the deadline. This is known as time decay.
For example, an option with a fixed end date for its execution may be worth less and less as the end date approaches. This is particularly relevant with regard to derivatives that are built on the movement of a particular underlying security. As the end date approaches and it becomes clearer to which direction the security will move, the risk is lower. Therefore, the market value of the derivative falls accordingly.
Why Does a Wasting Asset Matter?
All assets depreciate eventually. Investors should be aware of the extent to which wasting assets may disappear, leaving the investment with little or no asset base. For a business, it should invest in processes to ensure that its assets are renewable, recyclable, and sustainable. At the same time, wasting assets may be well worth the initial investment, yielding substantial profit for the company.
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