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Fair value

The theoretical, fair value of an option when chances of profit and loss are considered equal.

The fair value is an indicator for the evaluation of options and warrants, and is calculated based on theory models for pricing options. This fair value is calculated by considering parameters which cannot be derived from the market value of a warrant. These include the volatility of the underlying instrument, the interest rate and the dividend yield.

Generally, it is assumed that a single price must be determined for financial instruments with the same qualities, such as maturity, interest rates or underlying security ("law of one price"). If the instrument is not valued fairly, investors can exploit price differences to make so-called arbitrage profits.

Related topics
Black-Scholes model

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