18.3 Embedded Option Market Value Signage

When an instrument has an embedded option, the market value of that option may have a positive or negative market value depending on both the balance sheet category of the holding instrument and the type of embedded option.

Example: Suppose a bank owns a variable rate mortgage (an asset) with an embedded rate life cap. The cap is a benefit to the issuer of the debt, that is, the bank has sold this option to the borrower, thus they are short the option. Hence, while the market value of the mortgage is positive, the embedded option is reported as a negative value.

Table 18-2 Market Value details of Embedded Option Market Value Signage

Market Values
OptionFreeMortgage	100
Embedded Cap Value	-1
Capped Mortgage	99