What is meant by "PIP" as used in Forex terminology?

A pip is the last decimal place of a quotation. The PIP (or POINT) is how we will measure our profit or loss. For example if the EUR/USD moves from 0.9550 to 0.9551 that is 1 Pip. As each currency has its own value it is necessary to calculate the value of a pip for that particular currency. We also want a constant so we will assume that we want to convert everything to US Dollars. In currencies where the US Dollar is quoted first the calculation would be as follows:

• JPY rate of 116.73 (notice the JPY only goes to two decimal places, most of the other currencies have four decimal places). In the case of the JPY 1 pip would be .01 therefore USD/JPY: (.01 divided by exchange rate = pip value) so .01/116.73=0.0000856
• USD/CHF: (.0001 divided by exchange rate = pip value) so .0001/1.4840 = 0.0000673
• USD/CAD: (.0001 divided by exchange rate = pip value) so .0001/1.5223 = 0.0001522

In the case where the US Dollar is not quoted first and we want to get to the US Dollar value we have to add one more step.

• EUR/USD: (0.0001 divided by exchange rate = pip value) so .0001/0.9887 = EUR 0.0001011 but we want to get back to US Dollars so we add another little calculation which is EUR X Exchange rate so 0.0001011 X 0.9887 = 0.0000999 when rounded up it would be 0.0001.
• GBP/USD: (0.0001 divided by exchange rate = pip value) so 0.0001/1.5506 = GBP 0.0000644 but we want to get back to US Dollars so we add another little calculation which is GBP X Exchange rate so 0.0000644 X 1.5506 = 0.0000998 when rounded up it would be 0.0001.

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Tags: PIP

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