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Derivatives

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  • May 27, 2020
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Notional Principal Contract

Derivative contracts/ arrangements such as swaps, options, caps, floors, forward rate agreements (FRA), futures, or any similar instrument. The value of a notional principal contract is determined based on a notional face value that does not per se constitute an obligation of one of the parties to the contract to the other, but rather is used as a reference for calculation of the obligation. The value of such contracts (financial instruments) is based on a notional principal amount (NPA) that is used as a basis for calculation with reference to a specified index, and is paid at specified intervals in exchange for a preset consideration or a promise to pay an amount in consideration as determined in the contract. For example, a futures contract has a notional value (known as contract notional value) calculated as the product of multiplying the contract unit by the futures price.

Notional principal contracts are also known as notionals.


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