About Contract Notional Value

CME Group2

08/15/17

The content has been provided by a third party not affiliated with E*TRADE. The material is for educational purposes only.

 

Disclaimer

The information in the market commentaries have been obtained from sources believed to be reliable, but CME Group does not guarantee its accuracy and expressly disclaim all liability. Neither the information nor any opinions expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts. The information on this site compiled by CME Group is for general purposes only. All information and data herein is provided as-is. CME Group assumes no responsibility for any errors or omissions. CME Group, its affiliates and any third party information and content providers expressly disclaim all liability with respect to the information and data contained herein including without limitation, any liability with respect to the accuracy or completeness of any data. You use the data herein solely at your own risk. All data and information provided herein is not intended for trading purposes or for trading advice.

CME Group, the Globe Logo, Chicago Mercantile Exchange Inc., Globex and CME are trademarks of Chicago Mercantile Exchange Inc. CBOT is the trademark of the Board of Trade of the City of Chicago, Inc. NYMEX is the trademark of the New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc. All other marks are held by their respective owners.

Copyright (c) 2017 CME Group. All rights reserved.

Contract Unit and Contract Notional Value

 

Contract Unit

 

The contract unit is a standardized size unique to each futures contract and can be based on volume, weight, or a financial measurement, depending on the contract and the underlying product or market.

For example, a single COMEX Gold contract unit (GC) is 100 troy ounces, which is measured by weight.

A NYMEX WTI Crude Oil contract unit (CL) is 1,000 barrels of oil, measured by volume.

The E-mini S&P 500 contract unit (ES) is a financial calculation based on a fixed multiplier times the S&P 500 Index.

 

Contract Notional Value

 

Contract notional value, also known as contract value, is the financial expression of the contract unit and the current futures contract price.

 

Determining Notional Value

 

Assume a Gold futures contract is trading at price of $1,000. The notional value of the contract is calculated by multiplying the contract unit by the futures price.

Contract unit x contract price = notional value

100 (troy ounces) x $1,000 = $100,000

If WTI Crude Oil is trading at $50 dollars and the contract unit is 1000 barrels, the notional would be;

$50 x 1,000 = $50,000

Now assume E-mini S&P 500 futures are trading at 2120.00. The multiplier for this contract is $50.

$50 x 2120.00 = $106,000

 

The Importance of Contract Unit and Notional Value

 

Notional values can be used to calculate hedge ratios versus other futures contracts or another risk position in a related underlying market.

 

Hedge Ratio

 

How might a portfolio manager, with a $10M U.S. equity market exposure, use notional value of E-mini S&P 500 futures to determine a hedge ratio?

Hedge ratio = value at risk/notional value

We can determine the hedge ratio using our previous example of the E-mini S&P 500 futures with a value of $106,000.

Hedge ratio = 10,000,000/106,000

Hedge ratio= 94.33 (approximately 94 contracts)

If the portfolio manager sells 94 E-mini S&P 500 futures against her long equity cash position, she has effectively hedged her market risk.

Visit the Futures Research Center to explore market data and trading insights.