What is an embedded derivative?
What is an embedded derivative?
An embedded derivative causes some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable. However, in the case of a non-financial variable that variable should not be specific to a party to the contract.
A derivative that is attached to a financial instrument but is contractually transferable independently of that instrument, or has a different counterparty, is not an embedded derivative, but a separate financial instrument. If a hybrid contact contains a host, that is an asset within the scope of the financial instrument standard, the entity shall apply the requirements specified in the standard for a financial asset to the entire hybrid contact.
