» Order Forex Course » Member Login » Contact

A "pip" is the smallest increment in any currency pair. In EUR/USD, a movement from .8951 to .8952 is one pip, so a pip is .0001. In USD/JPY, a movement from 130.45 to 130.46 is one pip, so a pip is .01.

CALCULATING THE WORTH OF A PIP

How much in dollars is this movement worth, for example, per 10,000 Euros in EUR/USD? How much is one pip worth per 10,000 Dollars in USD/JPY? We will refer to the size, in this case 10,000 units of the base currency, as the "Notional Amount". The formula for calculating a pip value is therefore:

(one pip, with proper decimal placement / currency exchange rate) x (Notional Amount)

Using USD/JPY as an example, this yields:

(.01/130.46) x USD 10,000 = $0.77 or 77 cents per pip

Using EUR/USD as an example, we have:

(.0001/.8942) x EUR 10,000 = EUR 1.1183

But we want the pip value in USD, so we then must multiply EUR 1.1183 x (EUR/USD exchange rate): EUR 1.1183 x .8942 = $1.00

This is in fact a phenomenon you will see with any currency in which the currency is quoted first (such as EUR/USD or GBP/USD): the pip value is always $1.00 per 10,000 currency units. This is why pip (or "tick") values in currency futures, where the currency is quoted first, are always fixed.

Approximate pip values for the major currencies are as follows, per 10,000 units of the base currency:

USD/JPY: 1 pip = $.77 (i.e. a change from 130.45 to 130.46 is worth about $.77 per $10,000)

EUR/USD: 1 pip = $1.00 (.8941 to .8942 is worth $1.00 per 10,000 Euros)

GBP/USD: 1 pip = $1.00 (1.4765 to 1.4766 is worth $1.00 per 10,000 Pounds)

USD/CHF: 1 pip = $.59 (1.6855 to 1.6866 is worth $.59 per $10,000)

 

© Copyright 2004 ForexMentor.com. All rights reserved. disclaimer - privacy - guarantee