Theoretical Value

Theoretical value

Applies to derivative products. Mathematically determined value of a derivative instrument as dictated by a pricing model such as the Black-Scholes model.

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theoretical value

The calculated price at which a security should sell. Depending upon investor expectations and market imperfections, a security may sell at a price above or below its theoretical value.

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Theoretical Value

In options and futures contracts, a mathematically derived estimate of the value of the contract. The most frequently used method to calculate the theoretical value is the Black-Scholes Pricing Model. Depending upon the efficiency of the market and/or the presence of inside information, an option may trade at, above, or below its theoretical value. The concept has come under criticism for not accurately describing true market value: because theoretical value is based on past performance, it does not take into account potential future events such as changes in demand.