Notional
The reference amount used to calculate a derivative's cash flows, which is not itself exchanged.
The exam loves to make you separate notional from value (mark-to-market): notional is fixed and contractual, while a forward commitment’s value is zero at initiation and then drifts as the underlying moves. A classic item gives a “$50 million notional” swap or forward and asks for the at-initiation value — the trap answer is $50 million; the correct answer is zero (the fixed/forward rate is set so the two legs have equal present value). Another favorite uses notional to back out a payment: a floating-leg cash flow equals the reference rate (now SOFR, not legacy LIBOR) times notional times the day-count fraction — notional is a multiplier, never the cash transferred.
Don’t conflate notional with the forward/swap price, nor with margin or premium. With a forward, notional reflects the quantity of the underlying; a swap behaves like a strip of off-market forwards, scaling every periodic payment. The student error is treating gross notional as exposure — but counterparty credit exposure tracks net replacement value. Notional sizes the bet; it is never the bet itself.
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