Notional swap values massively overstate their economic importance.

Evidence

Many swaps “cancel out” other swaps (see the previous note), and the replacement cost of a swap is usually much less than the notional principal, which does not change hands. So chapter l’s caveats about the way in which total notional amounts overstate the economic importance of derivatives certainly apply to swaps. — Donald MacKenzie, An Engine, Not a Camera, 1603

Categorization

• DEFINE: Distinguishes notional principal from replacement cost in swap valuation.
• XREF: connects to: Nominal derivatives totals overstate their significance by roughly a hundredfold — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 32; Derivatives notional amounts vastly exceed their underlying market values — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1380; Notional derivatives totals exaggerate economic significance by roughly a hundredfold — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 32

Broader Connections

• Derivatives notional amounts vastly exceed their underlying market values #expands (0.95) — Donald MacKenzie, An Engine, Not a Camera, 1380