Risk & Money ManagementContract ValueNotional Exposure
Notional Value
The full market value of the underlying a position controls, calculated as lots times contract size times price.
What Notional Value means
Notional value describes what a position is worth in the market rather than what it cost to open. For spot forex it is the number of lots multiplied by the contract size and, where the base currency differs from the account currency, converted at the prevailing rate. One standard lot of EUR/USD is 100,000 euro of base currency, which at 1.0850 equates to 108,500 US dollars. Notional value drives the margin requirement, the pip value and the aggregate exposure figure.
It is the right measure for comparing risk across instruments, since a lot means different things in different markets and lot counts alone are not comparable. Two points cause confusion. Notional is quoted in the base currency by some platforms and the quote currency by others, so the convention needs checking before figures are added together. And because of leverage, notional value routinely dwarfs account equity, which is precisely why small percentage moves translate into large percentage changes in equity.
Worked example
A 0.3 lot EUR/USD position at 1.0850 has a notional value of 30,000 euro, or 32,550 US dollars, even though the margin needed to hold it at 1:30 leverage is only about 1,085 dollars.
Related terms
- ExposureThe total market risk an account carries, measured by the aggregate notional value of its open positions.
- LeverageThe ratio between the notional size of a position and the margin a trader must post to open and hold it.
- Contract SizeThe number of units of the underlying instrument represented by one lot or one contract.
- Standard LotA position of 100,000 units of the base currency, the benchmark trade size in forex.
- MarginThe portion of account equity a broker sets aside as collateral to open and maintain a leveraged position.
Frequently asked questions
What does Notional Value mean in forex trading?
The full market value of the underlying a position controls, calculated as lots times contract size times price.
How does Notional Value work in practice?
It is the right measure for comparing risk across instruments, since a lot means different things in different markets and lot counts alone are not comparable. Two points cause confusion. Notional is quoted in the base currency by some platforms and the quote currency by others, so the convention needs checking before figures are added together. And because of leverage, notional value routinely dwarfs account equity, which is precisely why small percentage moves translate into large percentage changes in equity.
What is an example of Notional Value?
A 0.3 lot EUR/USD position at 1.0850 has a notional value of 30,000 euro, or 32,550 US dollars, even though the margin needed to hold it at 1:30 leverage is only about 1,085 dollars.
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