what is notional value 
notional value is a term often used by derivatives traders to refer to the total value of the underlying asset in a contract it can be the total value of a position how much value a position controls or an agreed upon amount in a contract put simply it is the face value that is used to determine payments on a financial asset this term is used when describing derivative contracts in the options futures forwards and currency markets investopedia julie bangunderstanding notional valuenotional value is the face or total value of a position in a financial instrument such as a derivatives trade it helps distinguish the total value of a trade from the market value or cost of taking the trade there is a clear distinction between the two notional value accounts for the total value of the position while the market value is the price at which that position can be bought or sold in the marketplace notional value can be calculated as follows the notional value of derivative contracts is much higher than the market value due to leverage using borrowed money leverage allows someone to use a small amount of money to theoretically control a much larger amount the amount of leverage used can be calculated by dividing notional value by market value 1l nv mv where l leverage nv notional value mv market value begin aligned text l text nv div text mv textbf where text l text leverage text nv text notional value text mv text market value end aligned l nv mvwhere l leveragenv notional valuemv market value notional value is integral in assessing portfolio risk which can be very useful when determining hedge ratios to offset that risk 2 for example say a fund has a 1 million long exposure to u s equity markets and the fund manager wants to offset that risk using the e mini s p 500 futures contracts they would have to sell an approximately equivalent amount of s p 500 futures contracts to hedge their market exposure risk if the notional value of each e mini s p 500 futures contract is 140 000 the market value is 10 000 hr cer nvrua hr 1 000 000 140 000 7 14 where hr hedge ratio cer cash exposure risk nvrua notional value of related underlying asset begin aligned text hr text cer div text nvrua text hr 1 000 000 div 140 000 7 14 textbf where text hr text hedge ratio text cer text cash exposure risk text nvrua text notional value of related underlying asset end aligned hr cer nvruahr 1 000 000 140 000 7 14where hr hedge ratiocer cash exposure risknvrua notional value of related underlying asset so the fund manager would sell approximately seven e mini s p 500 contracts to effectively hedge their long cash position against market risk the market value would be 70 000 uses in swaps options and foreign currencieswhile notional value can be used in futures and stocks total value of the stock position in the ways discussed above notional value also applies to interest rate swaps total return swaps equity options and foreign currency derivatives in interest rate swaps the notional value is the specified value upon which interest rate payments will be exchanged the notional value in interest rate swaps is used to come up with the amount of interest due typically the notional value on these types of contracts is fixed during the contract s life 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 this is swapped for payments by another party that pays the appreciation of notional value notional value in an option refers to the value that the option controls for example abc trades for 20 with a particular abc call option costing 1 50 one equity option controls 100 underlying shares a trader purchases the option for 1 50 100 150 the notional value of the option is 20 100 2 000 buying the stock option contract would potentially give the trader control over 100 shares of stock for 150 compared with if they purchased the stocks outright for 2 000 the notional value of an equity options contract is the value of the shares controlled rather than the cost of the transaction foreign exchange fx derivatives like forwards and options have two potential notional values however for typical over the counter otc trades in fx derivatives the notional value will be in line with the common quoting convention of the currency pair primary currency secondary currency 3for example if the trade is in gbp usd gbp as the primary currency then the amount of say 10 000 000 will commonly be the notional amount of the trade but if the trade is in usd jpy the notional value would be 10 000 000 using usd as the primary currency if the trade were in aud nzd the notional amount would be in aud and so on depending on the circumstances the initiating counterparty may seek to use the secondary currency as the notional amount instead for example an american fund manager wants to buy usd 10 million worth of british stock priced in gbp when gbp usd is currently trading at 1 3000 in this case the notional amount would be 10 million or 7 692 million it s mostly a matter of convenience for the two counterparties to decide on when initiating a trade example of notional valuea contract has a unique standardized size that can be based on factors such as weight volume or multiplier for example a single comex gold futures contract unit gc is 100 troy ounces and an e mini s p 500 index futures contract has a 50 multiplier 45 the notional value of the former is 100 times the market price of gold while the notional value of the latter is 50 times the market price of the s p 500 index if someone buys an e mini s p 500 contract at 2 800 then that single futures contract is worth 140 000 50 2 800 therefore 140 000 is the notional value of that underlying futures contract however the person buying this contract isn t required to put up 140 000 when taking the trade rather they only need to put up an amount called the initial margin market value which is usually a fraction of the notional amount the leverage used would be the notional amount divided by the price of buying the contract if the price initial margin for one contract was 10 000 then the trader was able to use 140 000 10 000 14 times leverage 