Basics of Credit Derivatives

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Credit derivatives terminology

By Vinod Kothari

 

 

Embedded derivative: A derivative that is embedded or inherent in a composite contract, the whole of which is not a derivative contract. For example, investment in a credit linked note is a composite contract, that has an embedded derivative – protection sold. A convertible bond also has an embedded derivative – the option to convert the bond into equity. Upon certain conditions, accounting standards (FAS 133, IAS 39) require an embedded derivative to be split and separately accounted for.

 

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