## What is 'Notional Value'

Notional value is the total value of a leveraged position's assets. This term is commonly used in the options, futures and currency markets which employ the use of leverage, wherein a small amount of invested money can control a large position in the markets.

For example, one S&P 500 index futures contract obligates the buyer to 250 units of the S&P 500 index. If the index is trading at \$1,000, then the single futures contract is similar to investing \$250,000 (250 x \$1,000). Therefore, \$250,000 is the notional value underlying the futures contract.

Next Up

## BREAKING DOWN 'Notional Value'

The notional value is essentially how much of a particular asset an investor has. It is often mixed with market value but there is a clear distinction: The notional value and market value both describe the amount of a security. The notional value accounts for the total number of forwards, options, foreign exchange currencies and futures, while the market value is the price of a security that can be bought or sold in the market.

Notional value may be seen and used in five ways: through interest rate swaps, total return swaps, equity options, foreign currency exchange derivatives and exchange-traded funds (ETFs).

## Interest Rate Swaps

In interest rate swaps, the notional value is the specified value on which exchanged interest payments are based on. The notional value in interest rate swaps is used to come up with the amount of interest due for an interest-only class.

## Total Return Swaps

Total return swaps involve a party that pays a floating or fixed rate multiplied by a notional value amount plus the decrease in notional value amount of property. This is swapped for payments by another party that pays the appreciation of notional value amount of the involved property.

## Equity Options

Shares of stock also involve notional values. Instead of the term "notional," it is coined as "nominal."

For example, ABC is trading for \$20 with a call option of \$1.50. One equity option has 100 underlying shares. A trader purchases the option for \$1.50 x 100 = \$150. The notional value of the option is \$20 x 100 = \$2,000. Buying the stock option contract would potentially give the trader control over a hundred shares of stock for \$150 compared to if he purchased the stocks outright for \$2,000. The notional value of an equity options contract is the value of shares that is controlled rather than the value that is owned. Note that the notional value changes as the stock price moves up or down.

## Foreign Currency Exchange and Foreign Currency Derivatives

Foreign exchange derivatives like forwards and options have two notional values. Since these involve trading two currencies, they both receive separate notional values. Hedging foreign currency also involves having a fixed foreign currency notional value.

For investments to perform like another well-performing fund, exchange-traded funds track and follow other positions. Some ETFs do not directly buy the positions. Instead, they use derivatives such futures to create the position.

Inverse exchange-traded funds have the unique characteristic of having a different notional value daily. The reason behind this is the daily compounded return is paid making it reinvest its daily earnings.

RELATED TERMS
1. ### Notional Principal Amount

In an interest rate swap, the predetermined dollar amounts on ...
2. ### Airbag Swap

An airbag swap features an adjustable notional value, providing ...
3. ### Fixed Price

The leg of a swap that is based on an unchanging interest rate. ...
4. ### Floating Price

The leg of a swap that is based on a fluctuating interest rate. ...
5. ### Index Amortizing Swap - IAS

An interest rate swap where the notional principal amount declines ...
6. ### Accreting Principal Swap

An accreting principal swap is a derivative contract that features ...
Related Articles

### How To Value Interest Rate Swaps

Interest rate swaps are derivative instruments that enable counterparties to exchange fixed and floating cash flows.

### Currency Swap Basics

Find out what makes currency swaps unique and slightly more complicated than other types of swaps.

### Hedging with currency swaps

The wrong currency movement can crush positive portfolio returns. Find out how to hedge against it with currency swaps.

### An Introduction To Swaps

Learn how these derivatives work and how companies can benefit from them.

### Derivatives 101

Learn how to use derivatives to hedge, speculate or increase leverage in an investment portfolio.
6. Investing

### How To Read Interest Rate Swap Quotes

Puzzled by interest rate swap quotes terminology? Investopedia explains how to read the interest rate swap quotes
7. Investing

### Facebook Shares Could Continue to Soar, Options Indicate

Facebook Inc. shares have likely not finished rising, at least based on the options market.

### Derivatives 101

A derivative investment is one in which the investor does not own the underlying asset, but instead bets on the assetâ€™s price movement with another party.
9. Investing

### Amazon Option Bets Suggest More Gains May Lie Ahead

Amazon.com Inc. shares have risen by nearly 20% so far in 2018 and could go higher.
10. Investing

### Is Your Mutual Fund Safe?

You might be carrying more risk than you think if your fund invests in derivatives.
RELATED FAQS
1. ### What is the difference between derivatives and swaps?

Find out more about derivative securities, swaps, examples of derivatives and swaps, and the main difference between derivative ... Read Answer >>
2. ### What is the difference between derivatives and options?

A derivative is a financial contract that gets its value from an underlying asset.Â Options offer one type of common derivative. Read Answer >>
3. ### How do companies benefit from interest rate and currency swaps?

Interest rate and currency swaps help companies manage exposure to rate fluctuations and acquire a lower rate than they would ... Read Answer >>
4. ### Can individual investors profit from interest rate swaps?

Find out how individual investors can speculate on interest rate movements through interest rate swaps by trading fixed rate ... Read Answer >>
5. ### What would motivate an entity to enter into a swap agreement?

Learn why parties enter into swap agreements to hedge their risks, and understand how the different legs of a swap agreement ... Read Answer >>
Hot Definitions
1. ### Bond

A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
2. ### Compound Annual Growth Rate - CAGR

The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
3. ### Net Present Value - NPV

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
4. ### Price-Earnings Ratio - P/E Ratio

The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
5. ### Internal Rate of Return - IRR

Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
6. ### Limit Order

An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.