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What is a 'Pip'

A pip is the smallest price move that a given exchange rate makes based on market convention. Since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point; for most pairs, this is the equivalent of 1/100 of 1%, or one basis point. For example, the smallest move the USD/CAD currency pair usually makes is $0.0001, or one basis point.

BREAKING DOWN 'Pip'

A pip varies depending on how a given currency pair is traded; it is also possible but rare to price in half-pip increments. The value of one pip can have sharply different values depending on the currency pair and pricing convention.

EURUSD vs. USDJPY

The average exchange rate for the euro versus the U.S. dollar in 2015 was 1.1097; this is the number of dollars required to buy 1 euro. By market convention, the smallest pricing increment is 0.0001, which is approximately 0.0090%. The average exchange rate for the Japanese yen in the same year was 121.05, which is the number of yen needed to buy $1. In this instance, by market convention, one pip is 0.01 yen, which is 0.0082%.

A price move of one pip from 1.1097 to 1.1098 on a EURUSD trade of $1 million is a difference of EUR 81.20, or $90.11. A move of 1 pip from 121.05 to 121.06 on a USDJPY trade of $1 million is a difference of JPY 10,000 or $82.60. While the difference may look small, in the multi-trillion per day foreign exchange market, this quickly turns into a large number.

Turkish Lira

A combination of hyperinflation and devaluation can push exchange rates to the point where they become unmanageable. In addition to impacting consumers, who are forced to carry large amounts of cash, this can make trading unmanageable, and the concept of a pip loses meaning. The best known historical example of this took place in Germany's Weimar Republic, when the exchange rate collapsed from its pre-World War I level of 4.2 marks per dollar to 4.2 trillion marks per dollar in November 1923.

A more recent example is the Turkish lira, which had reached a level of 1.6 million per dollar in 2001, which many trading systems could not accommodate. The government eliminated six zeros from the exchange rate and renamed it the new Turkish lira, abbreviated YTL; its 2015 average exchange rate was a much more reasonable 2.9234 lira per dollar. A one pip move from 2.9234 to 2.9235 on $1 million is a difference of $34.20 as of 2016.

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