INTRINSIC VALUE OF AN OPTION
: It is defined as the amount by which an option is an ITM.
Fortunately, options-pricing models, such as the binomial model and the Black-Scholes model, exist to help us understand what the intrinsic value of an option
The stock price and option exercise price combine to create the intrinsic value of an option
. For example, if the stock price is $110 and the option exercise price is $100, the intrinsic value is $10, which is the minimum value of the option.
* Can the system differentiate between components of the change in fair value, such as time value and intrinsic value of an option
, for purposes of assessing hedge effectiveness?
First, the intrinsic value of an option
refers to the excess (if any) of the stock's value over the exercise price.
In effect, the intrinsic value of an option
disappears and a company must reprice to recapture value.
The intrinsic value of an option
is the difference between the underlying stock's exercise price and its FMV (the bargain element of the option).