Fair Value refers to the estimated price of an asset, liability, or security that reflects its true worth under normal market conditions. It represents the amount at which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an armís-length transaction ó that is, without any external pressure or compulsion.

In the stock market, fair value helps investors determine whether a security is overvalued or undervalued compared to its current market price. Analysts typically calculate it using various valuation models such as the Discounted Cash Flow (DCF) method, Price-to-Earnings (P/E) ratio comparisons, or asset-based valuation techniques. The goal is to estimate a reasonable value that reflects the assetís future earning potential and risk profile.

In derivatives markets, particularly in futures trading, fair value represents the theoretical price of a futures contract. It is calculated based on the spot price of the underlying asset, adjusted for factors such as interest rates, dividends, and time to expiry. This helps traders identify potential arbitrage opportunities ó for example, when the actual futures price deviates significantly from its calculated fair value.

From an accounting perspective, fair value measurement ensures transparency and accuracy in financial statements. According to international accounting standards (such as IFRS and Ind AS), companies are required to measure certain assets and liabilities at fair value to reflect their current market-based estimates rather than historical cost.

In summary, fair value serves as an essential benchmark for investors, accountants, and regulators. It provides a realistic and up-to-date measure of worth, facilitating better investment decisions, accurate financial reporting, and efficient market functioning. While fair value estimates rely on assumptions and models, they remain vital for assessing the true economic value of assets and securities.