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    Embedded Derivative

    Posted By : Devashish / Published on : 17-Apr-2019 06:54 AM / View : 788 / Comment : 1

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    Dear Members,

    Please throw light on Embedded Derivative??
    Read more on : derivative embedded

    • Dear Devashish

      A derivative is any financial instrument whose value depends on an underlying asset, price or index. An embedded derivative is the same as a traditional derivative; its placement, however, is different 

      An embedded derivative is a provision in a contract that modifies the cash flow of a contract by making it dependent on some underlying measurement. Like traditional derivatives, embedded derivatives can be based on a variety of instruments, from common stock to exchange rates and interest rates. Combining derivatives with traditional contracts, or embedding derivatives changes the way that risk is distributed among the parties to the contracts.

      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. 

      The embedded derivative modifies the host contract by changing the cash flow that would otherwise be promised by the contract. For example, when you take out a loan, you agree to repay the funds plus interest. When you enter this contract, the lender worries that interest rates will go up, but your rate will be locked in at a lower rate. He can modify the loan agreement by embedding a derivative, so that interest payments depend on another measurement. They could, for example, be adjusted according to a benchmark interest rate or a stock index.

      18-04-2019 / 04:50:34 AM
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