- Intrinsic value (finance)
In
finance , intrinsic value refers to the value of a security which isintrinsic to or contained in the security itself. It is also frequently called fundamental value. It is ordinarily calculated by summing the future income generated by the asset according to a criterion ofpresent value .Options
An option is said to have intrinsic value if the option is
in-the-money . Whenout-of-the-money , its intrinsic value is zero.The intrinsic value for an in-the-money option is calculated as the absolute value of the difference between the current
price ("S") of theunderlying and thestrike price ("K") of the option, floored to zero.:
More specifically, for a call option
:
while for a put option
:
For example, if the
strike price for a call option isUSD 1 and the price of the underlying is USD 1.20, then the option has an intrinsic value of USD 0.20.The total value of an option is the sum of its intrinsic value and its time value.
Equity
In valuing equity,
securities analyst s may usefundamental analysis - as opposed totechnical analysis - to estimate the "intrinsic value" of a company. Here the "intrinsic" characteristic considered is the expectedcash flow production of the company in question. "Intrinsic value" is therefore defined to be thepresent value of all expected future netcash flow s to the company; it is calculated viadiscounted cash flow valuation. SeeValuation using discounted cash flows .As opposed to the
book value , or break-up value, of a business, the "intrinsic value" is the value of a business' ongoing operations.Warren Buffett is best known for his ability to calculate the intrinsic value of a business, and then buy that business at a discount to its intrinsic value.Real Estate
In valuing
real estate , a similar approach may be used. The 'intrinsic value' of real estate is therefore defined as the netpresent value of all future netcash flow s which are foregone by buying a piece of real estate instead of renting it in perpetuity. These cash flows would include rent, inflation, maintenance and property taxes. This calculation can be done using thegordon model .See also
*
Net Realizable Value
*Option time value
*Option (finance)
*Expected value External links
* http://www.investopedia.com/terms/i/intrinsicvalue.asp
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