Pip
value is an important topic in Forex Market. Forex traders always
calculate Pip value in Forex Market. It's a simple calculation. A "pip"
is the smallest increment in any currency pair. In EUR/USD, a movement
from .8832 to .8833 is one pip, so a pip is .0001. In USD/JPY, a
movement from 132.20 to 132.21 is one pip, so a pip is .01. 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:
(.01/132.21) x USD10,000 = $0.757
or 76 cents per pip
Using EUR/USD as an example, we have:
(.0001/.8833) x EUR10,000 = EUR 1.1321118
But we want the pip value in USD, so we then must multiply EUR1.1183 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, GBP/USP, or AUD/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 = $.76; In other words a change from 132.20 to 132.21 is worth about $.76 per $10,000.
EUR/USD: 1 pip = $1.00; .8832 to .8833 is worth $1.00 per 10,000 Euros.
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