finance
Finance is a term for the management, creation, and study of money
In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the left corn ...
, specifically in foreign exchange market
The foreign exchange market (Forex, FX, or currency market) is a global decentralized
Decentralization or decentralisation is the process by which the activities of an organization, particularly those regarding planning and decision maki ...
s, a percentage in point or price interest point (pip) is a unit of change in an exchange rate
In finance
Finance is a term for the management, creation, and study of money
In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, ...
of a currency pair
A currency pair is the dyadic quotation of the relative value of a currency unit against the unit of another currency in the foreign exchange market
The foreign exchange market (Forex, FX, or currency market) is a global decentralizatio ...
.
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
The foreign exchange market (Forex, FX, or currency market) is a global decentralized
Decentralization or decentralisation ...
) are traditionally priced to four decimal
The decimal numeral system
A numeral system (or system of numeration) is a writing system
A writing system is a method of visually representing verbal communication
Communication (from Latin ''communicare'', meaning "to share") is t ...
places, and a pip is one unit of the fourth decimal place: for dollar currencies this is to 1/100 of a cent
Cent may refer to:
Currency
* Cent (currency)
The cent is a monetary unit
Unit may refer to:
Arts and entertainment
* UNIT, a fictional military organization in the science fiction television series ''Doctor Who''
* Unit of action, a discrete ...
. 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
In financial markets, the tick size is the smallest price increment in which the prices are quoted. The meaning of the term varies depending on whether stocks, bonds, or futures are being quoted.
Bonds
U.S. mortgage bonds and certain corporate bond ...
. 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 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.Example
If the currency pair of theEuro
The euro (currency symbol, symbol: euro sign, €; ISO 4217, code: EUR) is the official currency of 19 of the Member state of the European Union, member states of the European Union. This group of states is known as the eurozone or euro area ...
and the U.S. Dollar
The United States dollar (symbol
A symbol is a mark, sign, or word that indicates, signifies, or is understood as representing an idea, Object (philosophy), object, or wikt:relationship, relationship. Symbols allow people to go beyond wha ...
(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 USD 650,000 and closes the position after the 10 pips' appreciation, the trader will receive USD 650,500 with a profit of USD 500 (i.e. 500,000 (5 standard lots) × 0.0010 = USD 500). Most retail trading by speculators is conducted in margin accounts, requiring only a small percentage (typically 1%) of the purchase price as equity
Equity may refer to:
Finance, accounting and ownership
*Equity (finance), ownership of assets that have liabilities attached to them
** Stock, equity based on original contributions of cash or other value to a business
** Home equity, the differe ...
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 platform An electronic trading platform is a piece of computer software that allows users to place orders for financial products over a network with a financial intermediary. These products include products such as stocks, bonds, currencies, commodities, an ...
s have brought greater price transparency and price competition to the foreign exchange markets. 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 for their forward contracts or non-deliverable forwards.See also
* *References
{{DEFAULTSORT:Percentage In poInt Foreign exchange market