The value of an option is composed of two parts: the intrinsic value of the option and the time value of the option
, which is primarily related to the uncertainty of future price movements of the underlying asset.
* Volatility: The greater the volatility of the stock, the greater the time value of the option, because the stock has more potential to shoot higher than the exercise price.
* Time remaining: The further away the expiration date, the greater the time value of the option, because the stock price has more time to appreciate.
Moreover, Figure 2 shows the time value of the option to delay the investment in First, which we compute as the difference between the E-NPV of First and the net present value of a committed investment in First.
Figure 4 shows how the time value of the option to invest in First depends on [eta] and [gamma].
The size of the waiting region for First, and thus the time value of the option, is increased when the correlation is higher.
In Figure 6 we note that the time value of the option to invest is almost independent of the volatility of First.
The time value of the option
reflects the fact that the underlying price of the security can change before the expiration of the contract.
APBO 25 provides that: The charge to a company's earnings for an option grant is the amount of its "intrinsic" value, not its "fair value"--in other words, the time value of the option
Option theory suggests that early exercise of an option always costs the holder because they immediately lose the time value of the option
. Financial theory suggests that for ordinary options that are marketable, it never pays to exercise; rather, you should sell the option to someone else who can use the remaining period of the option.
At 2-01-X2, BC adjusts the receivable and option to their current values, adjusts accumulated other comprehensive income (AOCI) to reflect the decline in time value of the options
, collects the receivable, and exercises the option.