- Suppose EUR/USD moves from 1.0884 to 1.0984. This would be described as a 100-pip movement (1.0984-1.0884 =0.0100).
- Suppose USD/JPY (the Japanese yen) falls from 117.83 to 116.83. This is also a 100-pip movement (117.83-116.83 = 1.00) because the price changed by 100 of the smallest unit (0.01 for this pair).
Calculating gains and losses in pips and dollars and cents
Here are a couple of examples to show the steps for calculating foreign exchange gains and losses.
We'll first assume that we think the value of the euro will rise against the U.S. dollar. Thus, we buy 100,000 units of EUR/USD at the price of 1.1000. To complete this trade, we are effectively buying 100,000 euros at the price of 110,000 U.S. dollars.
Let's say the pair rises 100 pips to 1.1100.
The 100,000 euros we purchased are now worth 111,000 U.S. dollars. Once we subtract the 110,000 U.S. dollars we invested, we're left with a profit of $1,000.
Each pip is thus worth $10 each.
Alternatively, suppose we think the value of the euro will decline against the U.S. dollar. We sell 100,000 units of the EUR/USD pair, effectively exchanging 100,000 euros to buy dollars. The 100,000 euros will buy $110,000 U.S. dollars at the quoted exchange rate (100,000*1.1000 = $110,000).
