notional amount

The notional amount is the total value used as a reference point in financial contracts like derivatives, such as options or swaps. It doesn’t represent the actual amount exchanged but serves as a basis for calculating payments or gains based on changes in market variables. For example, in a interest rate swap with a notional of $1 million, the payments are calculated based on that $1 million figure, though the actual money exchanged may be less or different. Essentially, it’s a standardized value that helps measure and specify the size of a financial agreement.