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“Keltec has entered into long term arrangement to buy oil from a foreign company whose currency is Dinar, the contract is in Pounds”
Could you explain how this is an embedded derivative?
To answer it let’s get you thinking about it by asking you the question, what is an embedded derivative?
Embedded derivative is basically when a contract has both a derivative element and non-derivative item I believe?
And derivative is when it’s value changes according to the value of an underlying
Correct, so if you look at your first question the contract exists between the two parties to but oil and as the value of the Dinar fluctuates against the Pound there is a derivative element as the value of the contract will change as the underlying item changes.
Thanks
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