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Variable notional option/swap
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An Option or Swap where the notional value is linked to the Underlying asset price or rate. Usually changes in the notional Will be directly proportional to changes in the Underlying price; ie, they both decrease or increase together. Such derivatives have two main uses. In an Equity Swap, the fixed-rate receiver can opt to receive the return of either a fixed number of stocks, or the number of stocks that could be purchased for a fixed sum. The former case amounts to a variable notional amount for the Swap. An example using an Option is the case of a firm that sells more exports as Exchange rates decline and its products therefore become cheaper abroad. Since it NOW has greater foreign Currency revenue to Hedge, it would purchase a variable notional Currency Option for this purpose.
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Privatebanking.com
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