# What Is 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.

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Hedging and protective strategies generally involve additional costs and do not assure a profit or guarantee against trading losses.

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