The notional amount (or the principal amount of reason or notional value ) in the financial instrument is the nominal or nominal amount used to calculate the payments made on the instrument. This amount is generally unchanged and is thus referred to as notional.
Video Notional amount
Description
Contrast bonds with interest rate swaps:
- In the bond, the buyer pays the principal amount at issue (start), then receives the coupon (calculated from the principal) during the validity period of the bond, then receives the loan principal back at maturity (end).
- In the swap, there is no change of the hand base at the beginning or the expiration date (end), and in the mean time, interest payments are calculated on the basis of the notional amount, acting as if the principal amount of the bond, then the term notional principal amount , shortened to notional .
Simply stated, the amount of the notional principal is basically how many assets or bonds a person possesses. For example, if a premium bond is purchased for  £ 1 then the principal amount of reason is the sum of the nominal value of a premium bond that your Ã,  £ 1 can buy. Therefore the notional principal amount is the quantity of the assets and bonds.
Maps Notional amount
Example
Swap rate
In the context of interest rate swaps, the notional principal amount is the amount specified in which the interest payments are exchanged are based; this could be 8000 US dollars, or 2.7 million pounds, or any other combination of numbers and currency. Each level of the period is multiplied by the amount of the notional principal to determine the height and currency of each payment from the other party. Notional notional amount is the amount used as a reference to calculate the amount of interest due on 'interest-only class' which is not entitled to any subject.
Swap total refund
In the total total return swap, one party pays a fixed or floating rate multiplied by the principal amount plus depreciation, if any, in the notional amount of the property in lieu of payments by the other party of the award, if any, at the same notional amount of the property. For example, assume the underlying property is the S & amp; P 500. A will pay B LIBOR times the notional amount of $ 100 plus depreciation, if any, on a notional $ 100 investment in the S & amp; P 500. B will pay A appreciation, if any, in S & amp; P 500 is the same.
Equity options
The stock also has a notional principal amount but is called nominal not a notional.
If you purchase a stock option contract, for example, the contract may potentially give you more shares than you can control by buying shares directly. So the notional value is the value of what you control rather than the value of what you have.
So, for example, if you buy the stock equity option 100 with a $ 60 strike for a stock that is currently trading at $ 60, then you have the same upside potential as someone holding $ 6,000 shares (1 option ÃÆ'â €? 100 multiplierà ¢ â, ¬ â € "$ 60), but you may only pay $ 5/share (for a total of $ 500), so with this size you have reached a leverage of $ 6,000/$ 500 = 12 x . Note that if the stock price moves to $ 70, your current dollar notional is $ 7,000 (- option fee and commission differential), but your quantity (unit notional) is still 1 contract.
Foreign exchange/exchange or derivative "FX"
In FX derivatives, such as forwards or options, there are two notional. Suppose you have call option on USD/JPY at 110, and you buy one of these. Then this gives you the option to pay 100 USD and receive 110 Ã,ÃÆ'â € "100 = 11,000 JPY, so the USD face value is 100 USD, and the JPY notional is 11,000 JPY.
Note that notional ratios are exactly strikes, and thus if you move strikes, you must change one or the other. For example, if you move a strike to 100, then if you hold USD fixed at 100, notional JPY to 10,000: You will pay the same amount of USD, and receive a few JPY. Alternatively, you can hold the JPY constant at 11,000 and convert USD to 110: You pay more USD and receive the same amount of JPY (you have changed the JPY price, in USD denomination).
When limiting the exposure of foreign currency, (say for US USD business, outflow 11,000 JPY) it is foreign currency that must be fixed.
ETF
The exchange-traded fund tracks the underlying position, so the investment performs equally to buy some of these physical positions, although the funds may actually not buy positions immediately, and instead use derivatives (especially futures) to generate positions.
Levered ETFs, especially inverse exchange-traded funds, have unusual properties that change notional every day: this is because they pay a combined daily return, so it's as if someone reinvents daily income at a new daily price: if someone has an ETF reversed in a downed asset, someone has more money, which is used to shorten cheaper assets, one unit unit increases, and vice versa if assets have increased in value. See inverse exchange-traded fund for mathematical details.
Note
External links
- Chicago Mercantile Exchange: Glossary
Source of the article : Wikipedia
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