In
finance
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of f ...
, specifically in
foreign exchange markets, a percentage in point or price interest point (pip) is a unit of change in an
exchange rate of a
currency pair.
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 (US$) and the euro. It is also widely used as a third reserve currency after the US dollar and the ...
) 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
Cent may refer to:
Currency
* Cent (currency), a one-hundredth subdivision of several units of currency
* Penny (Canadian coin), a Canadian coin removed from circulation in 2013
* 1 cent (Dutch coin), a Dutch coin minted between 1941 and 1944
* ...
. 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 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 the
Euro
The euro ( symbol: €; code: EUR) is the official currency of 19 out of the member states of the European Union (EU). This group of states is known as the eurozone or, officially, the euro area, and includes about 340 million citizens . ...
and the
U.S. Dollar
The United States dollar ( symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the official ...
(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 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
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 diff ...
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 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