Percentage in point
Encyclopedia
In finance
, a percentage in point (pip) is the smallest commonly quoted change of an exchange rate
of a currency pair
.
The major currencies, except the Japanese yen
, are priced to four decimal places. For these currencies a pip is one unit of the fourth decimal point, or 1/100th of one percent. For the Japanese yen, a pip refers to one unit in the second decimal point, because the yen is much closer in value to one hundredth of other major currencies. This would be different for the other currencies.
vs. 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 increased by 10 pips.
In this example, if a trader buys 5 standard lots (i.e. 5 x 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 and achieved a profit of 500 US dollars (i.e. 500,000 (5 standard lots) x 0.0010 = USD 500). Most retail trading by speculators is conducted in margin accounts, requiring that only a small percentage (typically 1%) of the purchase price is required as equity
for this transaction.
s have brought greater price transparency and price competition to the foreign exchange market
s. 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.
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
, a percentage in point (pip) is the smallest commonly quoted change of an exchange rate
Exchange rate
In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...
of a currency pair
Currency pair
A currency pair is the quotation of the relative value of a currency unit against the unit of another currency in the foreign exchange market. The currency that is used as the reference is called the counter currency or quote currency and the currency that is quoted in relation is called the base...
.
The major currencies, except the Japanese yen
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 and the euro. It is also widely used as a reserve currency after the U.S. dollar, the euro and the pound sterling...
, are priced to four decimal places. For these currencies a pip is one unit of the fourth decimal point, or 1/100th of one percent. For the Japanese yen, a pip refers to one unit in the second decimal point, because the yen is much closer in value to one hundredth of other major currencies. This would be different for the other currencies.
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.Example
If the currency pair of the EuroEuro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
vs. 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 increased by 10 pips.
In this example, if a trader buys 5 standard lots (i.e. 5 x 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 and achieved a profit of 500 US dollars (i.e. 500,000 (5 standard lots) x 0.0010 = USD 500). Most retail trading by speculators is conducted in margin accounts, requiring that only a small percentage (typically 1%) of the purchase price is required as equity
Equity (finance)
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...
for this transaction.
Fractional pips
Electronic trading platformElectronic trading platform
In finance, an Electronic trading platform is a computer system that can be used to place orders for financial products over a network with a financial intermediary. This includes products such as shares, bonds, currencies, commodities and derivatives with a financial intermediary, such as a...
s have brought greater price transparency and price competition to the foreign exchange market
Foreign exchange market
The foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
s. 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.