Define and explain the logic for the time value of an option. Explain the value of the time value of an option for deep out-of-the money and deep in-the-money options

What will be an ideal response?

Answer: The time value of an option exists because the price of the underlying currency, the spot rate, can potentially move further and further into the money before the option's expiration. Time value is the area between the total value of the option and its intrinsic value. An investor will pay something today for an out-of-the-money option (i.e., zero intrinsic value) on the chance that the spot rate will move far enough before maturity to move the option in-the-money. Consequently, the price of an option is always somewhat greater than its intrinsic value, since there is always some chance — some might say 'hope everlasting' — that the intrinsic value will rise by the expiration date. For deep out-of-the money and deep in-the-money options the value of the time value of an option is insignificant since the chances for the option to increase in value are slim.