derivatives

Introduction Intrinsic value is a well defined and often used concept of option pricing theory. It is usually defined as the maximum of zero and the value the option would have if it were exercised immediately. This definition is straightforward to apply to vanilla option with single exercise decision, but its application to more complex options traded in energy markets (e.g. natural gas storage or power tolling) might be confusing. In this blog post we will develop intuition behind the definition of intrinsic value that will help us understand its importance and application to complex options.