Theoretical Value

The theoretical value of a security or a derivative is the price as determined by a quantitative model. A theoretical price is a good guide as to whether something is overpriced or under-priced. But because theoretical prices do not necessarily take into account supply or demand, or factors such as market sentiment or expected future developments, investors usuallyuse them as proxies of value. In the context of equity rights issues, market participants use the so-called theoretical ex-rights price (TERP) to determine how a stock should theoretically trade after the rights offering has concluded (bearing in mind the fact that rights offerings create dilution as a company is issuing more shares