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Embedded derivative
A component of a hybrid instrument that also includes a non-derivative host contract, which is made up of explicit or implicit contractual provisions that have an effect on some or all of the cash flows or on the value of other transfers provided for under the contract, so that these provisions are equivalent to a freestanding derivative.
(1) The conversion clause in the case of a convertible security is an example of an embedded derivative.
(2) In accounting standards, a derivative that is attached to a financial instrument, but is contractually transferable independently of that instrument or has a different counterparty from that instrument, is not an embedded derivative but a separate financial instrument.
Translations
Synonyms and variations
- Embedded derivative instrument
- Imbedded derivative n.