Percentage in point
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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 (economics), production, Distribution (economics), distribution, and Consumption (economics) ...
, specifically in
foreign exchange market The foreign exchange market (Forex, FX, or currency market) is a global decentralization, decentralized or Over-the-counter (finance), over-the-counter (OTC) Market (economics), market for the trading of currency, currencies. This market d ...
s, a percentage in point or price interest 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 t ...
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 e ...
) 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 of the Hindu–Arabic numeral ...
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 (currency symbol, symbol: euro sign, €; ISO 4217, code: EUR) is the official currency of 19 out of the Member state of the European Union, member states of the European Union (EU). This group of states is known as the eurozone o ...
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 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 platform In finance, an electronic trading platform also known as an online trading platform, is a computer software program that can be used to place orders for financial products over a network with a financial intermediary. Various financial products ...
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

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References

{{DEFAULTSORT:Percentage In poInt Foreign exchange market