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In the context of an interest rate swap, the notional principal amount is the specified amount on which the exchanged interest payments are based; this could be 8000 US dollars, or 2.7 million pounds sterling, or any other combination of a number and a currency.
The term notional principal contract (NPC) is a term of art used by U.S. federal income tax professionals for contracts based on an underlying notional amount (other financial services professionals refer to such NPCs under the more general heading "swaps," although not all swaps are NPCs). The reason the underlying amount is "notional" is that ...
The instruments can be almost anything but most swaps involve cash based on a notional principal amount. [1] [2] The general swap can also be seen as a series of forward contracts through which two parties exchange financial instruments, resulting in a common series of exchange dates and two streams of instruments, the legs of the swap.
the notional principal amount (or varying notional schedule); the start and end dates, value-, trade-and settlement dates, and date scheduling (date rolling); the fixed rate (i.e. "swap rate", sometimes quoted as a "swap spread" over a benchmark); the chosen floating interest rate index tenor; the day count conventions for interest calculations.
the vega notional: Like other swaps, the payoff is determined based on a notional amount that is never exchanged. However, in the case of a variance swap, the notional amount is specified in terms of vega, to convert the payoff into dollar terms. The payoff of a variance swap is given as follows:
It also specifies an initial exchange of notional currency in each different currency and the terms of that repayment of notional currency over the life of the swap. [ 1 ] The most common XCS, and that traded in interbank markets, is a mark-to-market (MTM) XCS, whereby notional exchanges are regularly made throughout the life of the swap ...
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In a currency forward, the notional amounts of currencies are specified (ex: a contract to buy $100 million Canadian dollars equivalent to, say US$75.2 million at the current rate—these two amounts are called the notional amount(s)). While the notional amount or reference amount may be a large number, the cost or margin requirement to command ...