Cross-rates, pips, figure
Cross rate and pip are two of the main terms in the forex market. Cross-rate is when two currencies are equal which follows from their forex currency exchange rate according to a forex rate of the third currency. Pairs of non-US dollar currencies are called "crosses." It is possible to withdraw cross exchange rates for the GPB, EUR, JPY and CHF from the mentioned above major pairs. Exchange rates must be firm in all currencies; otherwise, it will be possible to "return trip" and make non-risky benefits.
Assume that the following major exchange rates are known:
EUR/USD = 1.0060/65
GBP/USD = 1.5847/52
USD/JPY = 120.25/30
USD/CHF = 1.4554/59
To calculate GPB/CHF
GBP/USD: Bid: 1.5847 Offer: 1.5852
USD/CHF: 1.4554 1.4559
GBP/USD X USD/CHF = 1.5847 X1.4554 1.5852 X 1.4559
"Pips" are points, or minimal currency changes. Various instruments, or so-called currency pairs, are quoted with different accuracy, or different number of characters in their quotations. Most currencies are quoted with the accuracy of 0.0001, but some of them (e.g. yen) have cross-rates with the accuracy of 0.01. Usually Quotations are given in contracted form because big figures of quotations change quite slowly. It looks like this: EUR 10/15, which means UR/USD 1.1310/1.1315. Quotations can also change. Here are examples when it does:
- USD/JPY = 121.44 to USD/JPY = 121.45
- GBP/USD = 1.6262 to 1.6263
This means that that the price has changed by 1 point. In the previous examples, a dollar raised by 1 point comparatively to yen which decreased by 1 point, and pound also raised by 1 point.
The value of one point in US dollars differs both for different currencies and for the same currency with various quotations. The amount of the deal also influences the value of one point. Overall, the scheme for calculating the value of one point of the currency in US dollars can be demonstrated like this:
Value of the Point = Amount of Deal * Point
This scheme lets you get the results in the quoted currency. To calculate the value of one point back from the quoted currency to US dollars, divide the result by the “ask" (offer) rate of the quoted currency against US dollars - in case the quoted currency has a direct rate. Alternatively, multiply it by the “bid" rate of the quoted currency against US dollar - if the quoted currency has a reverse rate.
There's a position USD 200000, on the market of USDJPY
Accordingly, value of one point = 200000 * 0.01 = JPY 2000
If now the current rate is USDJPY 118.62/68, then value of one point in USD will be 2000/118.68 = USD 16.85
There's a position EUR 300000, on the market of EURGBP
Accordingly, value of one point = 300000 * 0.0001 = GBP 30
If now the current rate is GBPUSD 1.6101/07, then value of one point in USD will be 30*1.6101= USD 48.30
There's a position GBP 100000 on the market of GBPUSD
Accordingly, value of one point = 100000 * 0.0001 = USD 30
Another term is "figure." The scheme mentioned below will demonstrate the connection between pips and figures.
Currencies are quoted using four positions after the decimal point, which means that one pip is 1/10,000 of the currency unit. There is a difference of four pips between the "buy" and "sell" in the example above (EUR/USD), but there is no difference in the figures' value.
Here the Japanese yen is not the currency, which is quoted. The yen is quoted only two positions after the decimal point because of the high denomination of the yen against the USD (e.g. 121.23 - 121.39). So 1 pip = 1/100 of the Japanese currency unit. If you phone the dealer, he or she will tell you only the values of the pips. So ensure you know both the market situation and the value of the figures. If you are not, then it is better to figure it out.