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Percentage in point

Currency exchange rate fluctuation

Note

the unit of change in an exchange rate

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.

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, 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 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.

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.

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 pip.

Example

If the currency pair of the Euro and the U.S. Dollar (EUR/USD) is trading at an exchange rate of 1.3000 ( = ) 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 and closes the position after the 10 pips' appreciation, the trader will receive with a profit of (i.e. 500,000 (5 standard lots) × 0.0010 = ). 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.

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. 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 pip.

Table of pip values

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

Currency	Pip value
EURUSD
GBPUSD
USDJPY
USDCAD
AUDUSD
USDCHF
NZDUSD
USDDKK
USDSEK
USDNOK
USDHKD
USDBRL

References

Info: Wikipedia Source

This article was imported from Wikipedia and is available under the Creative Commons Attribution-ShareAlike 4.0 License. Content has been adapted to SurfDoc format. Original contributors can be found on the article history page.

foreign-exchange-market

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