Notional Value

A term used for valuing the underlying assets in a derivatives trade is called as national value. It could be the total value of a position or the value a position controls or an amount which is agreed-upon in a contract. The term notional value is used to describe derivative contracts in the futures, options and currency markets. The notional value of derivative contracts is higher than that of its market value because of a concept called leverage.
Leverage lets one to use a certain amount of money to control a much larger amount, theoretically. So, this helps in distinguishing the total value of a trade from its market value or cost of taking up that trade. The amount of leverage utilized is calculated using the below formula:
Leverage = Notional Value/ Market Value

Notional values are often discussed in currency transactions and derivatives as those transactions often involve hedging i.e., a small amount of money which influences a large investment. 

Comments

Post a Comment

Popular posts from this blog

Drop Shipping

Image
A supply chain management method where the retailer does not keep stock of goods but transfers orders received from customers and its shipment details to the manufacturer, wholesaler or retailer, and then they ship it directly to the customer is called as drop shipping. Retail businesses make profit with the difference in wholesale and retail price but there are retailers who earn an agreed percentage of sales as commission which is paid to the retailer by the wholesaler. Drop shipping gained popularity as the seller need not keep goods in stock and they don’t have to take the stress of packing and dispatching them. The drop shipping retailer keeps goods on display in his physical brick and mortar store or even provides online product catalogue or hard copy to its customers for reviewing and purchasing.  This occurs when small retailers receive single large order for a product. Here, he arranges for the goods to be shipped directly from the manufacturer or distributor ...
Read more

Bid-Ask Spread

Image
The amount by which the ask price is exceeded by the bid price for an asset in the market is called as a bid-ask spread. It is essentially the difference between the highest price a buyer is willing to pay for an asset and probably the lowest one at which the seller would be willing to accept. An individual who is looking forward to sell will receive the bid price at which he is looking to buy, will end up paying the ask price. In short, bid-ask spread is the difference between the highest price which a buyer is willing to pay for an asset and the lowest price a seller would be willing to accept. The transaction cost involved here is referred to as spread and the price takers buy at the ask price to sell them at bid price whereas market maker buys at bid price and sells them at the ask price. The bid represents demand, and ask is used to represent the supply for an asset. The bid-ask spread is used as the de facto measure for understanding market liquidity. More Info : ...
Read more

Bailment

Image
In common law, bailment refers to a contractual transfer of assets or property from a bailor to a bailee where the bailor temporarily relinquishes possession and not ownership of the property. It describes a legal relationship where a personal property’s physical possession is transferred from one person to another who later takes possession but not total ownership as such. Bailment, in finance, means legitimate transfer of securities like shares of stock from one individual (owner) to another for short selling. Here, short selling means an investment or trading strategy where people bet on a decline in the price of securities. An example of bailment is a leased apartment where a tenant possesses and uses the apartment but in reality he does not own it. There are three types of bailments: a.        A bailment which benefits both the bailor and bailee b.        A bailment that benefits only the bailor c. ...
Read more