Notional value versus market value
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The notional amount or notional principal amount or notional value on a financial instrument notional value of a put option the nominal or face notional value of a put option that is used to calculate payments made on that instrument.
This amount generally does not change and is thus referred to as notional. Contrast a bond with an interest rate swap:. In simple terms the notional principal amount is essentially how much of the asset or bonds a person has.
Hence the notional principal amount is the quantity of the assets and bonds. In the context of an interest rate swapthe notional principal amount is the specified amount on which the exchanged interest payments are based; this could be US dollars, or 2. Each period's rates are multiplied by the notional principal amount to determine the height and currency of each counter-party's payment.
A notional principal amount is the amount used as a reference to calculate the amount of interest due on an 'interest only class' which is not entitled to any principal. In a typical total return swapone party pays a fixed or floating rate multiplied by a notional principal amount plus the depreciation, if any, in a notional amount of property in exchange for payments by the other party of the appreciation, if any, on the same notional amount of property.
Shares also have a notional principal amount but it is called nominal instead of notional. If you are buying stock option contracts, for example, those contracts could potentially give you a lot more shares than you could control by buying shares outright. So the notional value is the value of what you control rather than the value of what you own. In FX derivatives, such as forwards or options, there are two notionals.
Note that the ratio of notionals is exactly the strike, and thus if you move the strike, you must change one or the other notional. When hedging a foreign currency exposure, say for an American USD business, an outflow notional value of a put option 11, JPY it is the foreign currency notional that must be fixed.
Exchange-traded funds track underlying positions, so an investment performs equivalently to purchasing that number of physical positions, though the fund may in fact not directly purchase the positions, and instead use derivatives especially futures to produce the position.
Levered ETFs, notably inverse exchange-traded fundshave the unusual property that their notional changes every day: See inverse exchange-traded fund for mathematical details. From Wikipedia, the free encyclopedia.
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