Notional amount

(1) The face amount of a transaction typically used as the basis for interest payment calculations.
(2) The principal used to calculate interest and other payments under derivative contracts. The principal amount does not change hands under the terms of a derivative contract.

In an interest rate swap, each period´s interest rates are multiplied by the notional principal amount and the daycount to determine the actual amount each counterparty must pay. In such swaps the notional amounts are not exchanged, so any credit risk is limited to the net amount payable plus a potential future exposure factor. Descriptions of the size of the derivatives market almost always refer to notional principal amounts when in fact the amount of money at risk is a tiny fraction of that. For cash flow swaps credit exposure arises -- not against the notional -- but against the present value (market replacement cost of the in-the-money future terminal payment(s). Only in the case of cross curency swaps is there a change hands of the principal.