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Accounting for Derivatives and Hedging Activities by Frank J. Beil

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APPENDIX II

Embedded Derivatives

If derivatives are embedded in a financial instrument or other contract, the base contract (i.e., excluding the embedded derivative) is referred to as the host contract. The combination of the host contract and the embedded derivative is referred to as the hybrid instrument. An example of a hybrid instrument is a structured note that pays interest based on changes in the S&P 500 Index; the component of the contract that is to adjust the interest payments based on changes in the S&P 500 Index is the embedded derivative, and the debt instrument component of the contract that is to pay interest without such adjustment and to repay the principal amount is the host contract.

Certain financial instruments and other ...

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