Notional principal

What it means

The reference amount used to compute a derivative’s payments, which is usually never exchanged.

The exam angle

Notional wildly overstates economic exposure. Comparing a derivatives book’s notional with a balance sheet is a category error.

Where it appears in the syllabus

• DerivativesCFA Level I · exam weight 6–9% · Forwards, futures, swaps, options and arbitrage-free pricing.
• Financial Markets & ProductsFRM Part I · exam weight 30% · Institutions, market structure, futures, swaps, options, rates, FX, MBS.

Related terms

• Basis riskThe risk that a hedge and the exposure it hedges do not move together, leaving a residual.
• Contango and backwardationContango is a futures price above the spot price; backwardation is a futures price below it.
• DerivativeA contract whose value depends on the price of something else — an asset, a rate, an index or an event.
• Forward contractA private agreement to buy or sell an asset at a set price on a future date.
• Futures contractA standardised, exchange-traded forward, marked to market daily through a clearing house.
• Initial and variation marginInitial margin is the good-faith deposit required to open a futures position; variation margin is the daily cash…