embedded option investment & finance definition

An option that is an inseparable part of another instrument. Embedded options often are conversion features granted to the buyer or early termination options reserved by the issuer of a security. For example, this feature could be a call provision in corporate bonds that lets the issuer repay the borrower before the scheduled maturity date. Another example of an embedded option is the homeowner’s ability to repay the mortgage principal early; in this case, the option of early repayment is embedded within the mortgage agreement.