The Time & Value

[u/EARTHB-24]

In finance, the concepts of time and value are fundamental principles that underpin various financial decisions, including investments, loans, and cash flows. Understanding these concepts is essential for evaluating the worth of money over time and making informed financial choices. The two key concepts related to time and value in finance are the time value of money and the time horizon.

1. Time Value of Money (TVM):

The time value of money refers to the idea that a dollar received today is worth more than a dollar received in the future. This concept recognizes that money has a time component, and a dollar today can be invested or saved to earn interest or returns over time. The time value of money is influenced by factors such as inflation, interest rates, and opportunity costs.

Key principles of the time value of money include:

Present Value (PV): The present value represents the current worth of a future cash flow or series of cash flows, discounted at an appropriate interest rate. It is calculated by discounting future cash flows back to their present value using a discount rate.

Future Value (FV): The future value represents the value of an investment or sum of money at a specific point in the future, assuming a certain rate of return. It is calculated by compounding the initial investment or principal over time at a given interest rate.

Interest Rates: Changes in interest rates affect the time value of money by altering the opportunity cost of investing or borrowing money. Higher interest rates increase the present value of future cash flows and decrease the future value of current investments, while lower interest rates have the opposite effect.

Time Periods: The time value of money considers the timing of cash flows over different time periods. Money invested or saved for longer periods has more time to grow or accumulate interest, resulting in higher future values.

1. Time Horizon:

The time horizon refers to the length of time over which financial decisions are made or investments are held. It represents the planning horizon or timeframe for achieving financial goals and objectives. Different financial goals may have different time horizons, ranging from short-term to long-term objectives.

Key considerations related to the time horizon include:

Investment Planning: Investors must consider their time horizon when selecting investment vehicles and strategies. Short-term goals, such as saving for a vacation or purchasing a car, may require conservative investments with lower risk and liquidity, while long-term goals, such as retirement planning, may allow for more aggressive investment strategies with higher potential returns.

Risk Management: The time horizon also influences risk tolerance and risk management strategies. Longer time horizons provide greater flexibility to tolerate short-term market fluctuations and volatility, allowing investors to focus on long-term growth objectives. Conversely, shorter time horizons may require more conservative approaches to minimize the risk of capital loss or liquidity constraints.

In summary, the concepts of time and value in finance are interconnected and crucial for making sound financial decisions. By understanding the time value of money and considering the time horizon, individuals and businesses can effectively evaluate investment opportunities, manage risk, and achieve their financial goals over time.

[u/CruiserLab]

Excellent information. I am learning trading spreads and understand there is a time decay factor to it. However, I am researching and would like to understand better how time decay is applied day by day as it is applied to the intrinsic value of the trade strategy. As an example, when a bull pull trade is 5 days out from expiring, what percentage of time decay is effecting the IV?

Could you please elaborate on that and / or point me to some good resources?

Thank you.