Cross-rates, pips, figure

These terms - cross rate and pip - are ones of the main terms in forex trading.

First of all some words about cross-rates.

Cross-rate is the parity between two currencies which follows from their Forex currency exchange rate in relation to a Forex rate of the third currency.

Pairings of non-US dollar currencies are known as “crosses.” We can derive cross exchange rates for the GPB, EUR, JPY and CHF from the aforementioned major pairs. Exchange rates must be consistent across all currencies or else it will be possible to “round trip” and make profits without risk.

Example

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" - point - a minimal possible currency fluctuation. Different instruments (currency pairs) are quoted with different accuracy, i.e. with different number of characters in the quotation. The major part of currencies are quoted with 0.0001 accuracy, some, for example, yen and its cross-rates - with 0.01 accuracy. As big figures of quotations change quite slowly, quotations, as a rule, are given in contracted form: EUR 10/15, which means, for example, EUR/USD 1.1310/1.1315. When quotations change, for example, USDJPY=121.44 to USDJPY = 121.45 or GBPUSD = 1.6262 to 1.6263, they say, that the price has changed by 1 point. In the above examples dollar went up by 1 point relatively to yen (which went down by 1 point), pound went up by 1 point, as well.

The value of 1 point in US dollars differs not only for various currencies, but also for one and the same currency with different quotations this value can be different, besides, the value of one point depends on the amount of deal.

In general, the algorithm used to calculate the value of one point of each currency in US dollars can be expressed with the following formula:

Value of the point = Amount of deal * Point

When using this formula, you get the results of calculations in the quoted currency. In order to recalculate the value of one point from the quoted currency to US dollars, you should divide the result by ASK (Offer) rate of the quoted currency against US dollars - if the quoted currency has direct rate, or to multiply by BID rate of the quoted currency against US dollar - if the quoted currency has reverse rate.

For example:
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

And one more term is "figure".

The following example 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. In the above example, EUR/USD, there is a difference of 4 pips between “buy” and “sell,” but there is no difference in the value of the figures.

This is not the case when the Japanese yen is the currency being quoted. Due to the high denomination of the yen against the USD, e.g. 121.23 – 121.39, the yen is quoted two positions after the decimal point only. In this case one pip is equal to 1/100 of the Japanese currency unit.

When asked over the phone, the dealer will tell you only the values of the pips, presuming that you are aware of the market and know the value of the figures. If you are not sure about the figure, don’t forget to ask.