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Notional

• Is the stipulated principal amount for a swap transaction. There is no transfer of ownership in the principal for a swap; but there is an exchange in the cash flows for the designated coupons.

 
 Embedded terms in definition
 Cash flow
Cash
Exchange
Principal amount
Principal
Swap
 
 Referenced Terms
 Derivatives: (1) Financial instruments whose return profile is linked to, or derived from, the movement of one or more underlying index or security, and may include a leveraging factor, or (2) financial contracts based upon Notional amounts whose value is derived from an underlying index or security (interest rates, foreign exchange rates, equities or commodities).These are securities whose payoff depends (is derived from) the price of the underlying asset. There are two broad classes of derivatives, futures and forward contracts and options. A futures (or a forward) contract is an agreement to exchange an asset and pay for it sometime in the future. No cash is paid at the time of the agreement. The delivery price is determined at the time of the agreement.
An option gives the buyer the right (but not the obligation) to exchange the asset sometime in the future. A call option gives the buyer the right to buy the underlying asset at a fixed price. The put option gives the buyer the right to sell the underlying asset at a fixed price. See call and put.

 Fras: Under a FRA, one party agrees to pay another some fixed rate for some defined period on a Euro deposit having an agreed Notional sum. If the FRA were for the 4s 5s, the agreement would concern a one-month rate to be paid four months hence. A FRA is settled at maturity via a cash payment, the amount and direction of which depends, inter alia, on the difference between the agreed forward rate and the prevailing market rate at the time of settlement.

 Interest rate swap: An exchange by borrowers or asset holders of interest-rate payments at two different rates (often one rate is fixed, the other floating). In a basis swap, both rates are floating.The buyer of the swap agrees to make a number of fixed interest rate payments periodically to the seller on some agreed upon notational amount. In return, the seller agrees to make floating rate interest payment on the same dates to the buyer on the same notational amount.A binding agreement between counterparties to exchange periodic interest payments on some predetermined dollar principal, which is called the Notional principal amount. For example, one party will pay fixed and receive variable.Is the contract whereby one party typically agrees to exchange a floating rate for a fixed coupon rate. There are many variations to this theme. Some of these other swaps can be cross border, fixed-for-fixed, or floating-for floating. The common denominator to these transactions is the swapping of cashflows and not principal amounts. There are predetermined periodic adjustments in cash flow payments.

 Swap currency: The buyer of the swap agrees to make a number of fixed or floating interest rate payments periodically to the seller in one currency on some agreed upon Notional amount and receive payments denoted in another currency. For instance, one party pays UD dollars and receives British pounds. By entering into a currency swap, both parties attempt to hedge their FX exposures.

 Swap interest rate: The buyer of the Swap agrees to make a number of fixed interest rate payments periodically to the seller or some agreed upon Notional amount. In return, the seller agrees to make floating rate interest payment on the same dates to the buyer on the same notional amount. By entering into the swap, both parties attempt to hedge their interest rate exposures.

 
 Related Terms
 Notional principal amount

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