EMBEDDED DERIVATIVES change the host contract by making changes to the cash flow, which otherwise comes directly from the host contract. https://efinancemanagement.com/derivatives/embedded-derivatives

1. By:-
eFinanceManagement.com
https://efinancemanagement.com/derivatives/embedded-derivatives
Embedded Derivatives

2. 1. Meaning
2. Example
3. Risk Management with Embedded Derivatives
4. Accounting of Embedded Derivatives
5. Reference
Content

3. EMBEDDED DERIVATIVES change the host contract by making changes to the cash flow, which otherwise comes
directly from the host contract.
Meaning

4. Company A wants to issue a bond, but the payment of the interest is dependent on the price of oil. In this case, the
payment would go up or down on the basis of oil price movement. Here, the debt security (bond) is the host contract
with an embedded derivative (dependence of oil price).
Example

5. One can even use this type of derivative to guard against the currency risk. For instance, a company makes manufacturing
expenses in one currency, while it receives revenues in another currency. This way the company exposes itself to the
currency rate risk.
Companies can use an embedded derivative for protection or for covering up such risks. The company can talk to the
client and embed such risk in the sales contract.
Risk Management with Embedded Derivatives

6. The prudence and guidelines also suggest that if embedded derivate can trade in the normal course as a usual derivative,
then host contract and embedded derivative both should be shown separately.
Accounting of Embedded Derivatives

7. Reference
To know more about it, click on the link given below:
https://efinancemanagement.com/derivatives/embedded-derivatives