Notional value

From MarketsWiki
(Redirected from Notional)
Jump to navigation Jump to search

Notional value is the value of a derivative product's underlying assets at the spot (cash) price. The value of a futures contract, for example, is referred to as notional value. This value represents the equivalent dollar amount represented when trading a single futures contract. In the stock market, there is no “notional value,” because what you buy – and own – is based on the actual value of that stock.

To determine notional value of a futures contract, one needs to know the contract's size (a fixed, standard size) and the price per unit. The notional value is determined by multiplying the two.

For example, soybean futures with a price of $8.00 per bushel (price per unit) would have a notional value of $40,000. Simply multiply the market price – $8.00 – by the 5,000 bushels, which is the standard contract size for one soybean futures contract.

Knowing the notional value of a futures contract is important for traders because margins/performance bonds are generally calculated as a percentage of that value. Thus, if, for example, futures margins are five percent of a contract that has a notional value of $40,000, it would equal a minimum margin of $2,000 ($40,000 x .05 = $2,000). A futures contract with a notional value of $150,000 would equal a minimum margin of $7,500 ($150,000 x .05 = $7,500).