Why do American option values typically exceed their intrinsic values?
What will be an ideal response?
The time value of an option is the current price or value of the option minus its intrinsic value:
Time value of an option = Option price – Intrinsic value
Options have time value because the stochastic evolution of the underlying asset price provides possibilities of even better payoffs in the future compared to the intrinsic value. If this were not the case, the owner of the American option would exercise it.
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