What is the fair value framework?
The fair value framework is just a way to describe the principle that an asset has an inherent worth. It is the criteria that forms our understanding of an asset’s potential price, which is determined by the market.
Fair value and market value are often used interchangeably, but this is not necessarily the case. Fair value is the price that both the buyer and the seller agree upon. Because both are willing to pay the price, this becomes the actual selling value. Neither party in the transaction feels that they have lost out in some way, as both feel the asset was priced correctly.
Market value is the market capitalisation of the stock, which is based on supply and demand. It considers that people might pay more or less than the fair price, which is why it can give an indication of whether a company’s shares are over- or undervalued.