I am currently doing research on the relationship and the effect of hedging using financial derivatives on the amount of risks in banks.
And I noticed that most of the previous studies used the (Notional contract amounts) instead of the (fair value).
Can anyone provide me with the scientific reasons for this, and is there a better way to determine the size of the use of derivatives in the hedging process?
Because of leverage, the notional value of derivative contracts is much higher than the fair value. Leverage permitd you to use a small amount of money to theoretically control a much larger amount. So, notional value helps distinguish the total value of a trade from the cost ( fair value) of taking the trade, The notional value accounts for the total value of the position, while the market value is the price at which that position can be bought or sold in the security market place.
Hi,
One easy way to figure it is to calculate sensitivities, that represent the amount of risk in a financial product. You will find that most risks in derivative products are proportional to the notional, not the the market value which, by the way, can be even 0 at inception.
I thank all the researchers and interested people who gave me part of their time to answer the question...
I appreciate your efforts to clarify the issue...
My greetings
Abdisalan Warsame
Paul Louangrath
Clement Gervaise
Hamida Al Ajmi