Fair Value

Fair value is the theoretical price of an asset based on fundamental analysis, market data, and mathematical modeling. It represents the price at which an asset would trade in an efficient market with fully informed participants.

In the derivatives space, fair value is often calculated using models like Black-Scholes, which account for variables such as underlying price, time to expiration, and volatility. Discrepancies between the market price and the fair value create opportunities for arbitrage.

Understanding fair value is essential for risk management and the pricing of complex financial instruments. Protocols strive to align their market prices as closely as possible to the calculated fair value.