A percentage in point, also known as a pip or point, is the minimum possible change in the exchange rate between two currencies. Most major currencies are calculated out to one ten-thousandth, or four decimal places. In an instance where two major currencies are paired, such as the US Dollar and the Canadian Dollar (US/CAD), a percentage in point would be a change in the last, or fourth, decimal point.
Percentage in point is the basic evaluation in foreign exchange market trading, the buying and selling of the currencies of the world. Trading is done in currency pairs that establish an exchange rate. For instance, US Dollars can be used to purchase Euros by determining how many US Dollars it would take to purchase one Euro. The pip would reflect the smallest commonly quoted change in the exchange rate for this currency pairing, specifically $0.0001.
The exception in the major currencies in the value of a percentage in point is in regards to Japanese Yen. A percentage in point of a Yen pairing is a change in the second decimal place, since the value of the Yen to other major currencies is closer to one hundredth. Thus, a pip for a Yen pairing would reflect a 0.01 change.
An exchange rate price ratio is expressed in terms of the ratio of the base currency to the quote currency. In the example of using US Dollars to purchase Euros, if it took $1.50 US Dollars (USD) to purchase one Euro, the EUR/USD exchange rate would be expressed as 1.5000. A change in the exchange rate from 1.5000 to 1.5050 is a 50 pip change in the exchange rate between the two currencies.
A higher percentage in point change in the exchange rate of a currency pair reflects the reality that it has become more expensive to purchase the base currency with the quote currency. Thus, in foreign exchange market trading, investors look for lower percentage in point spreads between the currency pairs. Even a one pip change can make a substantial impact on a currency investor’s profit.
The percentage in point calculation has been greatly impacted by trading on electronic platforms in the foreign currency exchange market. These electronic platforms have increased the accuracy of the exchange rate quote, often adding another decimal point to the valuation. Fractional pip rates, in 1/10th of a pip, are used to reflect this greater accuracy.