Wednesday, June 29, 2022

What are Embedded derivatives? What does IFRS says about Embedded derivatives?

  1. A derivative is a financial instrument that gets its value from an underlying asset. An embedded derivative is similar to the usual derivative, with the only difference being in its placement. For instance, the usual derivatives are independent product that trade separately. However, embedded derivatives are part of a financial contract, which we can also call a non-derivative host contract.
  2. The non-derivative component here is also referred to as a host contract, and the combined contract is hybrid in nature.

Let’s consider an example

Let’s take an example of embedded derivatives. 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).

 Please watch the video to have more clarity on embedded derivatives

Link – https://www.youtube.com/watch?v=CYzUXwpDRfs

CA Divya Thakkarhttps://www.financeshadow.com
Chartered accountant | IIM Bangalore 7+years of experience in Consultancy, Investment Banking, Ecommerce & IT Industry. Expert in IFRS, USGAAP, INDAS & US Regulatory requirement. Currently working with Deloitte Touche & Company in Risk ,Finance & Control advisory. Worked in Companies like Barclays Bank, HCL Technologies Ltd & BazaarCart.

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