In foreign exchange markets, a percentage in point (pip) is a unit of change in an exchange rate of a currency pair.

The major currencies (except the Japanese yen) are traditionally priced to four decimal places, and a pip is one unit of the fourth decimal place: for dollar currencies this is to 1/100 of a cent. For the yen, a pip is one unit of the second decimal place, because the yen is much closer in value to one hundredth of other major currencies.[1]

In the forward foreign exchange market, the time value adjustment made to the spot rate is quoted in pips, or FX points or forward points.[2]

A pip is sometimes confused with the smallest unit of change in a quote, i.e. the tick size. Currency pairs are often quoted to four decimal places, but the tick size in a given market may be, for example, 5 pips or 1/2 pip.

Trading value

A rate change of one pip may be related to the value change of a position in a currency market. Currency is typically traded in lot size of 100,000units of the base currency. A trading position of one lot that experiences a rate change of 1 pip therefore changes in value by 10 units of the quoted currency or other instrument.[3]

Example

If the currency pair of the Euro and the U.S. Dollar (EUR/USD) is trading at an exchange rate of 1.3000 (1 EUR = 1.3 USD) and the rate changes to 1.3010, the price ratio increases by 10 pips.

In this example, if a trader buys 5 standard lots (i.e. 5 × 100,000 = 500,000) of EUR/USD, paying US$650,000 and closes the position after the 10 pips' appreciation, the trader will receive US$650,500 with a profit of US$500 (i.e. 500,000 (5 standard lots) × 0.0010 = US$500). Most retail trading by speculators is conducted in margin accounts, requiring only a small percentage (typically 1%) of the purchase price as equity for the transaction. The Japanese Yen is an exception to this rule because of its worth against the US dollar being 0.01 [4]

If the NZD/USD spot is trading at 0.8325 and the NZD/USD 1-year forward contract is traded at -270 pips, the outright 1-year forward is priced at 0.8055 (0.8325 - 0.0270).

Fractional pips

Electronic trading platforms have brought greater price transparency and price competition to the foreign exchange markets.[5] Several trading platforms have extended the quote precision for most of the major currency pairs by an additional decimal point; the rates are displayed in 1/10 pip.

Table of pip values

The table portrays pip values for selected currencies as used by Fenics MD[6] for their forward contracts or non-deliverable forwards.

CurrencyPip value
EURUSDUS$0.0001
GBPUSDUS$0.0001
USDJPY¥0.01
USDCADCA$0.0001
AUDUSDUS$0.0001
USDCHFSFr 0.0001
NZDUSDUS$0.0001
USDDKK0.0001 kr.
USDSEK0.0001 kr
USDNOK0.0001 kr
USDHKDHK$0.0001
USDBRLR$0.0001

See also

References

  1. ↑ Abdulla, Mouhamed (March 2014). Understanding Pip Movement in FOREX Trading (PDF) (Report). Archived from the original (PDF) on 2020-03-31. Retrieved 2014-03-26.
  2. ↑ "Calculating fx forward points". Retrieved 11 December 2019.
  3. ↑ Archer, Michael D.; Bickford, James L. (May 25, 2005). Getting Started in Currency Trading: Winning in Today's Hottest Marketplace. Hoboken, New Jersey: John Wiley & Sons. ISBN 978-0-471-71303-6.
  4. ↑ "Home". referralforex.com. Archived from the original on 2017-11-01. Retrieved 2017-11-17.
  5. ↑ "Pips and Spreads Explained - Forex Trading Basics". www.forexbrokersreviews.com. Retrieved 2017-04-04.
  6. ↑ "Fenics MD » RATES". Fenics MD. Retrieved 16 March 2020.
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