What do you understand by embedded derivative in finance?

It is a feature within the host contract which exhibit the behaviour of cash flows associated with this feature.

Lets assume your company's parent currency is Euro and it enters into a contract with a Japanese company whose parent currency is Yen. This contract is denominated in Dollars i.e. the payment terms and amount are in Dollars then essentialy the contract has created an embedded derivative. This is so because the value of the contract (payments etc) is calculated in dollar terms, and its value to the two companies is calculated based on their respective exchange rates. So the value of the contract is acting more or less like a stand alone derivative.