Notional value
Family I · Instruments
Not to be confused with tick value.
Notional value is the full face amount of the asset a derivative contract or leveraged position controls, rather than the capital actually committed. It is derived from the contract's size and the prevailing price of the underlying instrument. Because it measures exposure rather than cash outlay, notional value is the standard basis for comparing position sizes across markets.[1]
Calculation
For a single derivative contract, notional value equals the contract multiplier times the underlying price. For a position, multiply by the number of contracts held.
In leveraged spot or margin trading, notional value is the position size itself, not the margin deposited. A position opened with 1,000 in margin at 10:1 leverage has a notional value of 10,000.
Contract multipliers are set by the exchange or product specification and vary by instrument and venue.
Worked example
Uses and limitations
Notional value is used to measure market exposure, calculate margin requirements, and compare positions of different sizes. It does not represent the amount at risk: a derivative's profit or loss is determined by price changes applied to the notional, while the capital committed may be only a fraction of that figure.
For options, notional value is typically the underlying price times the contract multiplier, though some conventions use the strike price. The method varies by market and should be confirmed in the product specification.
Often confused with
- tick value
- Tick value is the money gained or lost per minimum price movement of a contract, whereas notional value is the full face amount of the position; the visible sign is that tick value is a small per-tick amount, while notional value is a large total exposure figure.
See also
References
- ↑ Contract specifications published by the broker or exchange for each instrument. Lot sizes, tick sizes and pip values are set per instrument and differ between venues; read the specification for the symbol you trade.