Percentage in point
Topic: Finance
From HandWiki - Reading time: 3 min
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.
| Currency | Pip value |
|---|---|
| EURUSD | US$0.0001 |
| GBPUSD | US$0.0001 |
| USDJPY | ¥0.01 |
| USDCAD | CA$0.0001 |
| AUDUSD | US$0.0001 |
| USDCHF | SFr 0.0001 |
| NZDUSD | US$0.0001 |
| USDSEK | 0.0001 kr |
| USDNOK | 0.0001 kr |
See also
- Finance:Basis point – One hundredth of a percent (‱)
- Pip (counting) – Easily countable items
References
- ↑ Abdulla, Mouhamed (March 2014). Understanding Pip Movement in FOREX Trading (Report). http://drmoe.org/misc/ForexPip.pdf. Retrieved 2014-03-26.
- ↑ "Calculating fx forward points". https://www.hedgebookpro.com/blog/calculating-fx-forward-points/. Retrieved 11 December 2019.
- ↑ 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. https://archive.org/details/gettingstartedin0000arch.
- ↑ "Home". https://www.referralforex.com/.
- ↑ "Pips and Spreads Explained - Forex Trading Basics" (in en-GB). http://www.forexbrokersreviews.com/trading-academy/pips-and-spreads/.
- ↑ "Fenics MD » RATES". http://www.fenicsmd.com/products/rates/. Retrieved 16 March 2020.
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