Percentage in point
Currency exchange rate fluctuation From Wikipedia, the free encyclopedia
In foreign exchange markets (forex), a percentage in point (pip) is a unit of change in an exchange rate of a currency pair. A pip is the smallest whole unit price move that an exchange rate can make, based on forex market convention.[1]
It's important because forex trading involves tiny fluctuations in exchange rates, and Pips provides a standardized way to express these changes. By using Pip, traders can easily understand and discuss price movements, and calculate profits and losses,[2] and manage risks more effectively.
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.[3]
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.[4]
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.
Calculating Pip Value
The value of a pip depends on the currency pair, the exchange rate, and the size of the trade position (usually measured in lots).[5]
If the U.S. dollar is the quote currency (the second of the pair), such as with the EUR/USD pair, the pip is fixed at .0001.
In this case, the value of one pip is calculated by multiplying the lot size by 0.0001. So, for the EUR/USD pair, multiply a lot size of, say, €10,000 by .0001. The pip value is $1. Having €10,000 bought against the dollar at 1.1055 and sold at 1.1065, gives a profit of 10 pips or $10.
If the U.S. dollar is the base currency (the first of the pair), such as with the USD/EUR pair, the pip value involves the exchange rate.
- (Pip Value)=(size of a Pip)/(Exchange Rate)×(Lot Size)[6]
For example, .0001 divided by a USD/CAD exchange rate of 1.3600 and then multiplied by a standard lot size of 100,000 results in a pip value of $7.35. Having US$100,000 bought against the Canadian dollar at 1.3600 and sold at 1.3601, gives a profit of 1 pip or $7.35.
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 = US$1.3) 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.[7]
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.[8] Several trading platforms have extended the quote precision, or "tick size", 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[9] for their forward contracts or non-deliverable forwards.
See also
- Basis point – One hundredth of a percent
- Pip (counting) – Easily countable items
References
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