Chapter 5, Part III. Fractions of the quote rate. Page 3

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 14, 2013.

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1. Sive Morten Special Consultant to the FPA

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Estimate the pip value in GBP if EUR/CHF rate is 1.5315 for 10 000 units of base currency (0.1 standard lot). Also take into consideration that the EUR/GBP rate is 0.8415.

Pipruit: Ok, let’s see… Wait a minute GBP neither Base nor Quote currency for EUR/CHF. What should I do then?​

Commander in Pips: May be you should think about the second condition – The EUR/GBP rate is 0.8415. What is that for?

Pipruit: Hm…​

Commander in Pips: Ok, I’ll give you a small clue - if we have EUR/USD rate and USD/CHF, how we can calculate EUR/CHF rate?

Pipruit: Oh, that’s not so hard: EUR/USD* USD/CHF = EUR/CHF​

Commander in Pips: And if we have EUR/USD and EUR/JPY, how we can calculate USD/JPY?

Pipruit: I suppose (EUR/USD)/(EUR/JPY)…. No, in this case we will get JPY/USD and we need USD/JPY. It should be done vice versa – (EUR/JPY)/ (EUR/USD) = USD/JPY.​

Commander in Pips: That’s it. Now try to solve the task…

Pipruit: Ok... from the first EUR/CHF rate, we can estimate the pip value in EUR, it will be 0.0001/1.5315 = 0.000065 or 0.65 EUR per 0.1 lot of base currency. Oh, and now we just can convert EUR to GBP at the exchange rate. As it appears, it’s quite simple:

0.000065*0.8415 = 0.000 055 or 0.55 GBP. The answer is 1 pip value in EUR/CHF equals to 0.55 GBP if all other conditions hold (rates, lot size).

But Sir, if the pip value depends on the rate, does it mean that it will be different at different rates?​

Commander in Pips: Sure, because if the Quote currency increases in value, then the value of a pip also increases. It’s fair, because rate becomes higher, so the pip value also becomes higher. To explain that – let’s get to the last task for today:

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