Extrinsic Value – Definition

Cite this article as:"Extrinsic Value – Definition," in The Business Professor, updated December 4, 2019, last accessed October 20, 2020, https://thebusinessprofessor.com/lesson/extrinsic-value-definition/.


Extrinsic Value Definition

The extrinsic value of an item refers to the value of the item outside of its intrinsic value, this can be derived from the amount of money assigned to the asset beyond the actual value. The extrinsic value of an item can be calculated as the variance between the intrinsic value of the item and the premium if the item (which is its market price). Extrinsic value is different from intrinsic value, the latter is the inherent value of an asset which forms the underlying price of such an asset. When measuring the extrinsic value of an item, external factors such as the size and the appearance of such an item can be considered.

A Little More on What is Extrinsic Value

Extrinsic value is an important metric in determining the price of an item or asset, it is the value of an object outside of inherent or intrinsic value. Typically, in an option, extrinsic can be determined by calculating the difference between the intrinsic value and premium of the asset or security. Intrinsic value, on the other hand, is identified by estimating the difference between the underlying price of an asset and the strike price of the option.

Factors Affecting Extrinsic Value

Since the extrinsic value of an asset or security is determined by external factors beyond the underlying price of the security. Time plays a crucial role in the value of an asset, so also market volatility or implied volatility. In many cases, ‘Time Value’ is another name traders or analysts describe extrinsic value. Time is a determining factor for extrinsic value because whether the option premium will increase or decrease is determined by the length of time the security or underlying asset used in the market.

Market volatility affects the extrinsic value of an asset significantly, this is because the tendency for an underlying asset to decrease or increase in price is dependent on its volatility.

Here are some crucial points you should know about extrinsic value;

  • Extrinsic value refers to the value assigned to an object or an item outside of its underlying value.
  • It is different from the intrinsic value which is the real value of an item.
  • The extrinsic value of an object can be measured as the difference between the intrinsic value of an object and the market price (premium) of the object,
  • Factors that affect extrinsic value are time and implied volatility.

Reference for “Extrinsic Value”

https://www.investopedia.com › Investing › Options





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