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Embedded Derivative
- Embedded derivative is a component of a security that is more then
one component, commonly called a hybrid security. An embedded derivative
can change the cash flow because it could be related to the exchange
rate or the price of the commodity, or some of variable that changes
often. This happens quite often when a company from a specific country
(United States) enters into ac contract with a German country, creating
a host contact. If the contract is denominated in a foreign currency,
an embedded foreign currency is created. It then has to be separated
from the host contract and recorded separately unless the economic and
risk characteristics are similar
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