Notional value

The whole value of the position a contract represents: the price of the instrument multiplied by the number of units the contract covers. It is the figure every result is calculated on. Because a margined contract requires only a percentage of that figure to be posted as collateral, an adverse move is measured against the whole contract rather than against the deposit, so a loss can exhaust the margin posted and is not limited to the amount deposited. A favourable move is measured on exactly the same basis and to exactly the same degree.

How the units are counted is a convention of the instrument, published in its contract size. A standard lot of a currency pair is one hundred thousand units of the first currency in the pair, so its notional is stated in that currency and has to be converted before it can be compared with an account held in another. A shares contract covers a stated number of shares, an index contract states an amount of money for each index point, and a commodity contract states a physical quantity such as barrels or troy ounces. One lot is therefore a completely different notional in two different markets, and the specification is the only place that says which.

Two misreadings recur. The first is treating the notional as what the contract cost, when it is what the contract is worth: the money required is the margin requirement applied to it, a percent set per instrument by the counterparty and, in regulated markets, subject to a floor imposed by the regulator. The second is expecting the notional to sit still. It is priced continuously, so it changes on every tick even though the number of units has not changed at all, and the margin held against it is recalculated on the same basis.

For contracts whose value does not move one for one with the underlying, the notional overstates what is actually at stake, and practitioners split on how to report it. One convention reports gross notional, which is comparable across firms and is the figure regulators collect. Another reports a delta adjusted or risk adjusted figure, which is closer to the exposure and is not comparable with anybody else's. Both appear in professional documentation, and a notional figure quoted without saying which convention produced it is ambiguous.