Embedded Derivative

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....erivative. A derivative is embedded in a Normal Host contract, Host Contract can be * Financial Liability [eg loan taken from a bank] * Non-Financial Item [eg purchase/sale of Goods, PPE etc.] When 'host Contract' & Dervative embedded in it are 'Not closely Related' then we need to separate Host Contract & Embedded Derivative. Precondition for segregation of embedded derivat....

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....rrying amount of the host insurance contract; OR * the exercise price of a prepayment option reimburses the lender for an amount up to the approximate present value of lost interest for the remaining term of the host contract. Lost interest is the product of the principal amount prepaid multiplied by the interest rate differential. The interest rate differential is the excess of the effective in....

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....denominated in commercial transactions around the world (such as the US dollar for crude oil transactions); or * a currency that is commonly used in contracts to purchase or sell non- financial items in the economic environment in which the transaction takes place (eg a relatively stable and liquid currency that is commonly used in local business transactions or external trade)." Unless th....