In
foreign exchange market
The foreign exchange market (forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. By trading volume, ...
s (forex), a percentage in point (pip) is a unit of change in an
exchange rate
In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of ...
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
The is the official currency of Japan. It is the third-most traded currency in the foreign exchange market, after the United States dollar and the euro. It is also widely used as a third reserve currency after the US dollar and the euro.
Th ...
) are traditionally priced to four
decimal
The decimal numeral system (also called the base-ten positional numeral system and denary or decanary) is the standard system for denoting integer and non-integer numbers. It is the extension to non-integer numbers (''decimal fractions'') of th ...
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
The euro (currency symbol, symbol: euro sign, €; ISO 4217, currency code: EUR) is the official currency of 20 of the Member state of the European Union, member states of the European Union. This group of states is officially known as the ...
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.
See also
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References
{{DEFAULTSORT:Percentage In poInt
Foreign exchange market