An embedded option (in a derivative contract, as the host contract) which is defined and customized as per the counterparties’ requirements prior to consummation of the host contract.

An example is an extendible swap (extendable swap) where its tenor can be extended beyond the original maturity. A 3-year interest rate swap might have an embedded option to extend the swap for two years. The counterparty with the embedded extension option holds a call option a 2-year swap that will become effective in 3 years. Alternatively, this counterparty can be seen as holding a put option on a 5-year swap, exercisable only at the end of the original tenor.