Percentage In Point

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.

See also

• Finance:Basis point – One hundredth of a percent (‱)
• Pip (counting) – Easily countable items

References

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