What is Time Value?
Time value refers to the portion of any option premium that is directly related to the amount of time remaining between the current date and the expiry date assigned to the warrant or options contract. Sometimes referred to as a time premium, the time value identifies the worth or value of the option or warrant above and beyond the intrinsic or face value assigned to the option. Calculating the time value is one tool used to assess the feasibility of purchasing a given options contract. A projected time value is calculated at the time of purchase. This essentially provides the investor with a good idea of what to expect in the way of a return on the investment, provided the applicable market conditions remain stable. From time to time, the time value can be calculated from the current date as well. This helps the investor to track the rate of return that can be expected for any remaining period of time until expiration. Because time value has to do with the worth of the options as they
If you’re like most people, you would choose to receive the $10,000 now. After all, three years is a long time to wait. Why would any rational person defer payment into the future when he or she could have the same amount of money now? For most of us, taking the money in the present is just plain instinctive. So at the most basic level, the time value of money demonstrates that, all things being equal, it is better to have money now rather than later. But why is this? A $100 bill has the same value as a $100 bill one year from now, doesn’t it? Actually, although the bill is the same, you can do much more with the money if you have it now because over time you can earn more interest on your money. Back to our example: by receiving $10,000 today, you are poised to increase the future value of your money by investing and gaining interest over a period of time. For Option B, you don’t have time on your side, and the payment received in three years would be your future value.
