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, also known as contract value, is the financial expression of the contract unit and the current futures contract price.
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
Notional values can be used to calculate hedge ratios versus other futures contracts or another risk position in a related underlying market.
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.