notional value
finance
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In financial instruments, the notional value (also called the notional amount and the principal amount) is the total value—in dollars or another unit of currency—controlled by an instrument. Depending on the underlying asset or financial instrument, notional value may be used to assess its cost to acquire, calculate payments on the asset or instrument, and, if purchased and/or held in a margin account, notional value may be used to determine the instrument’s buying power.
Examples of notional value include:
- Bond market. In corporate bonds, Treasury bonds, notes, and bills, and other fixed-income securities, the notional value is the face value, typically $100 or $1,000.
- Futures contract. In futures markets, notional value is based on the prevailing price and the contract size of the underlying commodity, stock index, or other financial instrument. For example, if corn is trading at $4.50 per bushel, a standard contract (5,000 bushels) would have a notional value of ($4.50 x 5,000) = $22,500. Futures contracts don’t require a deposit of the full notional value, but rather a “good faith” margin deposit based on notional value.
- Option contract. Standard U.S. equity option contracts are deliverable into 100 shares of the underlying stock or exchange-traded fund (ETF). For example, if shares of Walt Disney Co. (DIS) are trading for $105 per share, the notional value of a call option would be ($105 x 100) = $10,500. If you purchase shares in a cash account, you would be required to pay the full notional value in order to acquire the shares. If it’s a margin account, you may be allowed to borrow up to 50% of the notional value.