Understanding Embedded Derivatives

The FAS 133 Hedge Accounting feature in Risk Management enables you to record and account for embedded derivatives in the following two ways:

You enter two separate Risk Management deals: one for the host contract and one for the embedded derivative.
You enter the hybrid deal as a single deal using multiple detail lines/instrument base types if needed, and select the Embedded option on the Instrument Information component.

Note: The latter method is allowable only when the hybrid deal is not remeasured at fair value with changes in fair value reported in any account (such as earnings or OCI or any other account). If the hybrid deal is remeasured at fair value with changes in fair value reported in earnings as they occur, then the embedded derivative is not separated from the host contract (according to the guidance in ¶ 12(b). If the hybrid deal is remeasured at fair value with changes in fair value reported in any other account, then method (1) (separate deals) must be used to enter the hybrid instrument. This is because the system does not allow separate calculations to be made for the fair value of the host contract and the fair value of the embedded derivative.

You must examine specific contracts and ask if they contain an embedded derivative, determine how to split the embedded derivative from the host contract, and determine how best to use the Instrument Base Type architecture in PeopleSoft to split the hybrid contract into a host contract and a separated derivative.