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Hi Sir,
the answer to this particular part says:
”. As such the embedded derivative is
only separated out if the economic characteristics and risks of the embedded
derivative are not closely related to those of the host contract. This would
seem to be the case, because neither party to the contract has a functional
currency of Euros”It says that it would seem to be the case that economic characteristics and risks are not closely related….
However BPP study text says as an e.g of being closely related: ”oil contract where both companies report in euros but oil is priced in $. so no need to separate host and derivative.”
however the above question is same scenario yet it is said to have different economic characteristics and hence requiring separation?
Buy oil and settle in unexpected currency
2 separate contracts
Separate out
I can see the BPP point – but I think the key word is unexpected – i.e. not normal. For the exam I would delete the BPP point from your mind. The exam, believe it or not, is more straightforward than the textbooks.
Thank you,, I’d then keep this exam point in mind while answering future questions……
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