Time Value

The concept that money now is worth more than money in the future, because money now can earn a return by being lent out. In valuing companies, stock analysts use the concept of the time value of money to discount back the estimated future earnings of a company to their present value. This enables comparison of different companies whose future earnings may come at different times. By discounting, the value of those earnings is assessed on their present value, so like can be compared with like. In options, the time value is the amount by which an options price exceeds its intrinsic value. Options have a time value to reflect the fact that, in the time until expiry, the option holder has the opportunity to make profits if the underlying share price moves in his favour. As that expiry date approaches, the time value will decrease until it reaches zero.