Percentage in point
{{short description|Currency exchange rate fluctuation}}
{{About|the unit of change in an exchange rate|the countable items|Pip (counting)}}
In foreign exchange markets (forex), a percentage in point (pip) is a unit of change in an exchange rate of a currency pair. A pip is the smallest whole unit price move that an exchange rate can make, based on forex market convention.{{cite web |title=What Are Pips in Forex Trading and What Is Their Value? |url=https://www.investopedia.com/terms/p/pip.asp |accessdate=24 July 2023}}
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) are traditionally priced to four decimal places, and a pip is one unit of the fourth decimal place: for dollar currencies this is to {{frac|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.{{cite report|last=Abdulla|first=Mouhamed|title=Understanding Pip Movement in FOREX Trading|url=http://drmoe.org/misc/ForexPip.pdf|date=March 2014|access-date=2014-03-26|archive-date=2020-03-31|archive-url=https://web.archive.org/web/20200331141930/http://drmoe.org/misc/ForexPip.pdf|url-status=dead}}
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.{{cite web |title=Calculating fx forward points |url=https://www.hedgebookpro.com/blog/calculating-fx-forward-points/ |accessdate=11 December 2019}}
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 {{frac|1|2}} pip.
Example
If the currency pair of the Euro and the U.S. Dollar (EUR/USD) is trading at an exchange rate of 1.3000 ({{euro|1}} = {{USD|1.3}}) 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|650000}} and closes the position after the 10 pips' appreciation, the trader will receive {{USD|650500}} 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 for the transaction.
The Japanese Yen is an exception to this rule because of its worth against the US dollar being 0.01.{{cite web |url=https://www.referralforex.com/ |title=Home |website=referralforex.com |access-date=2017-11-17 |archive-date=2017-11-01 |archive-url=https://web.archive.org/web/20171101002856/https://www.referralforex.com/ |url-status=dead }}
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.{{Cite web|url=http://www.forexbrokersreviews.com/trading-academy/pips-and-spreads/|title=Pips and Spreads Explained - Forex Trading Basics|website=www.forexbrokersreviews.com|language=en-GB|access-date=2017-04-04}} 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 {{frac|1|10}} pip.
Table of pip values
The table portrays pip values for selected currencies as used by Fenics MD{{cite web |url=http://www.fenicsmd.com/products/rates/ |website=Fenics MD |accessdate=16 March 2020|title=Fenics MD » RATES }} for their forward contracts or non-deliverable forwards.
| class="wikitable" | |
| Currency | Pip value |
|---|---|
| EURUSD | {{USD|0.0001|link=yes}} |
| GBPUSD | {{USD|0.0001|link=yes}} |
| USDJPY | {{JPY|0.01|link=yes}} |
| USDCAD | {{CAD|0.0001|link=yes}} |
| AUDUSD | {{USD|0.0001|link=yes}} |
| USDCHF | {{CHF|0.0001|link=yes}} |
| NZDUSD | {{USD|0.0001|link=yes}} |
| USDDKK | {{DKK|0.0001|link=yes}} |
| USDSEK | {{SEK|0.0001|link=yes}} |
| USDNOK | {{NOK|0.0001|link=yes}} |
| USDHKD | {{HKD|0.0001|link=yes}} |
| USDBRL | {{BRL|0.0001|link=yes}} |
See also
- {{annotated link|Basis point}}
- {{annotated link|Pip (counting)}}