QUESTION 23 X Inc enters into a pay 6-month LIBOR and receive 8% fixed swap for 4 years on notional principal of $ 100 Million. Settlement date is every January 2 and July 2. If X Inc pays, the present value of the floating leg discounted at the current market yield of 7.25% the floating leg of the swap is prepaid at the inception. Should the contract still be considered as a derivative?


As per paragraph 9 of IAS 39, an embedded derivative is a component of a hybrid instrument that also includes a non-derivative host contract, with the effect that some of the cash flows of the combined instrument vary in a way similar to a standalone derivative. In this case, since the swap contract is a standalone derivative, it cannot be considered as an embedded derivative. Therefore, the contract would not be considered as a derivative.

Complete and Continue