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Hi Stephen,
Happy Easter!
I am quite confused why compound instrument and embedded derivatives are separate topics within Financial Instrument?
When I read through lectures, they seem like the same financial instrument. For example, for compound instrument I worked through the example of Convertible bond and similarly apparently Convertible bond is an example of embedded derivative too! So, please could you enlighten me the difference between these two instruments? If possible explanation with two distinct examples of instruments would help.
Thanks a lot.
I think they are more or less the same.
The term embedded derivative is used for both assets and liabilities, whereas the term compound instrument is usually associated with liabilities.
In the exam you are most likely to see two types of compound instruments:
1. Convertible loans
2. Share based pay with choice of settlementEmbedded derivatives are only ever mentioned once in a blue moon.
🙂
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