Embedded derivative instruments

Embedded derivatives are components of contractual arrangements that on a stand-alone basis, would satisfy the criteria in the definition of a derivative. These derivatives are often present in structured note contracts and other debt obligations, but they may also be found in such contracts such as leases, purchase agreements, insurance contracts, guarantees, and other tailored arrangements. Together with the main instrument it is called a "hybrid instrument." In accounting embedded derivatives must in general be treated as if they were free standing derivatives, unless (a) the characteristics and risks of the embedded derivative are clearly and closely related to those of the host, or (b) the hybrid instrument is re-measured at fair value with changes reported in earnings.