Notional Value And Leverage In Futures Trading
Notional value is the total worth of the underlying asset that is controlled in a derivatives trade, i.e. the amount you stand to lose. It doesn’t include additional fees such as commission and margin relief.
Buying power can fluctuate based on the position and market volatility. That’s why you don’t only need your initial margin amount, which is used to open your futures position, but you also need maintenance margin. This is the minimum amount needed in your account at any given time. A margin call occurs if the amount in your account is less than the maintenance margin.
Notional value is calculated by multiplying the spot price with the futures contract size, or number of units of the underlying asset. Let’s continue with our example of a 1,000 crude oil barrels futures contract at a price of $75.72 per barrel ($75.72 x 1,000). The notional value at risk in this case is $75,720.00.
Market value differs from the notional value – it’s the spot price of the underlying asset per unit, or the futures contract price. As per the example, the market value of crude oil is $75.72.
Further, leverage has a big impact on your trading. It means that you only have to commit a certain percentage of the full value of the trade upfront. Despite putting forth less initially, your risk remains the same for long positions – the notional value. If you went short on a futures contract, however, your risk isn’t capped.
