Intrinsic value (finance)

In finance, intrinsic value refers to the value of a company, , currency or product determined through fundamental analysis without reference to its market value. It is also frequently called fundamental value. It is ordinarily calculated by summing the discounted future income generated by the asset to obtain the present value. It is worthy to note that this term may have different meanings for different assets.

An option is said to have intrinsic value if the option is in-the-money. When out-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 the underlying and the strike price (K) of the option.

For example, if the strike price for a call option is USD $1 and the price of the underlying is USD 1.20, then the option has an intrinsic value of USD 0.20.

The value of an option is the sum of its intrinsic and its time value.

Stocks are assumed to be instruments because they are supposed to represent ownership interest in the company. However, the 'equity' label is somewhat questionable. Class C common stocks for example, do not have any voting rights or dividend privileges. They are still considered equity instruments by finance professionals, but shareholders are not entitled to the earnings of the underlying company and lack the right to voice an opinion.

In valuing equity, securities analysts may use fundamental analysis—as opposed to technical analysis—to estimate the intrinsic value of a company. Here the "intrinsic" characteristic considered is the expected cash flow production of the company in question. Intrinsic value is therefore defined to be the present value of all expected future net cash flows to the company; it is calculated via discounted cash flow valuation. This is not a proven theorem or a validated theory, but a general assumption.

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