The valuation of an FX option is made up of time value and intrinsic value. The intrinsic value of an FX option is the difference between the prevailing market forward rate for the expiry of the FX option versus the strike price. The time value of an FX option is the difference between the overall FX option valuation and the intrinsic value. By definition, time value is a function of the time left to the expiry of the FX option. The longer the time to expiry, the higher the time value as there is a greater probability of the FX option being exercised. If a company is hedge accounting FX options the time and intrinsic value must be separated. Intrinsic value can stay on the balance sheet but time value must be accounted for through the P&L. The requirement to do this will disappear under IFRS 9.
How Hedgebook helps:
Hedgebook is used to record, report and value FX options, including the split between time and intrinsic value.