## Which Factors Influence the Time Value of an Option?

In addition to the ratio exercise price/price of the underlying instrument, which determines the option's intrinsic value, the option price is influenced by a number of factors affecting the option's time value.

Traders and analysts enter all factors - exercise price, price of the underlying instrument, remaining lifetime, short-term interest rate, returns and volatility - into different option pricing models, depending on the underlying instrument and option terms.

 d1 = ln(S/B) + (r x 0,5v2) x t v x t-1/2 d2 = v x t-1/2
 C = Call value S = Current price N(d1) = Value of the cumulative standard deviation around the price, identical to the option‘s delta B = Exercise price e = Euler‘s constant t = Remaining lifetime of the option, in years N(d2) = Value of the cumulative standard deviation around the exercise price, or the probability that the option will end up in-the-money. ln = Natural logarithm v = annualised volatility r = risk-free interest rate

In the formula, S stands for share price and E for exercise price. The difference between them is the intrinsic value. Click on the formula for information on the other input factors.

European-style equity options, for which no dividends are paid during the lifetime, can be calculated using the Black-Scholes Model. It is also suitable for calculating prices of DAX options, for instance. The Eurex OptionMaster uses the Black/Scholes formula. Through entering a dividend and a payment date for the dividend you can also approximately calculate the prices for equity options with dividend payments.

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