In finance, specifically in foreign exchange markets, a percentage in point or price interest point is a unit of change in an exchange rate of a currency pair. The major currencies are traditionally priced to four decimal places, and a pip is one unit of the fourth decimal point: for dollar currencies this is to 1/100 of a cent. For the yen, a pip is one unit of the second decimal point, 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 and the U.S. Dollar 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 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. Most retail trading by speculators is conducted in margin accounts, requiring only a small percentage 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.
Fractional pips
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.
