A swap that varies in notional principal, rate or spread periodically to mimic predictably variable cashflows. As such, all notional, rate or spread schedules are set upfront and vary to hedge out either loan/ mortgage schedules or projects financed by a series of predictable future drawdowns. Therefore, a variable notional swap is simply a series of stand-alone swaps with the total swap price reflecting a weighted average of the individual swap rates. Usually, the notional value of a variable-notional swap is linked to an underlying asset price or rate. Therefore, changes in that rate or price will directly and proportionally cause the notional to change (for example, as the underlying price rises, the notional principal also increases, and vice versa).

An example of variable-notional swap is a variable-notional equity swap in which one counterparty (say the floating rate payer/ the fixed-rate receiver) will be paid the return of either a fixed number of shares, or the number of shares that could be bought for a fixed amount. This will result in a variable notional amount for the swap.

The opposite of a variable-notional swap is a fixed-notional swap.