Valuing options – working out how big a premium should be
paid, or what the option contract would fetch if sold to a third
party – is a complex subject. Inland Revenue staff will not
normally need to query the fair value which a company places on an
option (or any other sort of derivative contract) in its accounts.
If any questions of valuation do arise, they should consult Revenue
Policy, Capital and Savings (Shares Valuation Division).
There is more about fair value in the ‘Taxing
derivative contracts’ section – see
CFM13516.
You may hear the terms intrinsic value and time value used in
connection with options.
CFM11084a
explains what is meant by these terms.
Various mathematical models are used to price options. The
most widely known of these is the Black–Scholes model,
developed by Fisher Black and Myron Scholes. However, no one model
gives a right answer in every situation – it is necessary to
use a valuation technique appropriate to the facts of any
particular case.
