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Glossary

Notional Value

Notional value is the total face value of a financial position, such as a derivative contract, measured in the underlying asset's terms rather than the actual amount of money paid to enter the trade.

What Is Notional Value?

Notional value, also called notional amount or notional principal, is the full value of the assets that a financial contract is based on. It tells you how large a position is in terms of the underlying asset, even when the trader or investor puts up only a small fraction of that amount as cash or collateral. It is most commonly used with derivatives such as futures contracts, options, and interest rate swaps.

How It Works

Many derivatives let a participant control a large exposure with limited upfront money. Notional value expresses that exposure. For a futures contract, it is typically the contract size multiplied by the current price of the underlying asset. For an interest rate swap, it is the principal amount used to calculate the interest payments that the two parties exchange. The principal itself is usually not exchanged.

The calculation for a simple futures or options position is:

Notional value = contract size × price of the underlying asset

For example, if one contract covers 100 units of an asset priced at 50 per unit, the notional value is 5,000, even if the margin required to hold the position is only a few hundred.

Why It Matters to Investors

Notional value helps investors understand the scale of their market exposure. A small amount of capital can represent a large position, so gains and losses can be large relative to the money committed. Because of this, looking only at the cash invested can understate the risk. Notional value is also used by regulators and risk managers to measure the total size of derivatives markets, although the figure does not show how much money could actually be lost.

Limitations

Notional value is a measure of size, not of risk or market value. The market value of a derivative, which is what it would cost to close the position today, is usually much smaller and can change substantially. Two positions with the same notional value can have very different risks depending on their structure, leverage, and the volatility of the underlying asset.

Updated October 28, 2026. For general education only; not financial, tax or legal advice.

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Related Terms

Futures Contract

A futures contract is a standardized, legally binding agreement to buy or sell a specific asset at a set price on a future date, traded on a regulated exchange.

Options

An options contract gives the holder a right, not an obligation, to buy or sell an underlying asset at a set strike price by expiration, for a premium paid to the seller.

Interest Rate Swap

An interest rate swap is an agreement between two parties to exchange interest payments on a notional principal, typically one fixed-rate stream for one floating-rate stream, with only the net difference paid.

Market Value

Market value is the total price at which a company's shares, or any asset, would currently trade, usually calculated by multiplying the current share price by the number of shares outstanding.

Leverage

Leverage is the use of borrowed money or financial instruments to increase the potential return on an investment, which also magnifies potential losses.

Margin

Margin is borrowed money that a brokerage lends to an investor to buy securities, with the investor's own holdings serving as collateral for the loan.

Underlying Asset

An underlying asset is the financial instrument or commodity on which a derivative's value depends, such as a stock, bond, index, currency, or physical commodity.

Mark to Market (MTM)

Mark to market is an accounting practice of valuing an asset or liability at its current market price, rather than its original purchase price or book value, so reported figures reflect present conditions.