Embeded Derivatives

CA Akshay Joshi (CA) (386 Points)

30 December 2010

Hi to all

What is Embeded Derivative?

plz guide me

thanx & regards

othewise u can mail me at akyrj7 @ gmail.com

thanx to all

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2 Replies

CA Rachit K Patel (Chartered Accountant) (1503 Points)
Replied 30 December 2010

Dear Akshay,

A component of a hybrid security that is embedded in a non-derivative instrument. An embedded derivative can modify the cash flows of the host contract because the derivative can be related to an exchange rate, commodity price or some other variable which frequently changes. For example, a Canadian company might enter into a sales contract with a Chinese company, creating a host contract. If the contract is denominated in a foreign currency, such as the U.S. dollar, an embedded foreign currency derivative is created. According to the International Financial Reporting Standards (IFRS), the embedded derivative has to be separated from the host contract and accounted for separately unless the economic and risk characteristics of both the embedded derivative and host contract are closely related.

https://acct.tamu.edu/swanson/Readings_in_PDF/EmbeddedDerivativesEx.pdf

Please go through the link.

CA Rachit K Patel