For help with understanding pip and point value, please refer to the below example.
If an investor has Australian dollars and wants to purchase 10,000 in United States dollars at a quote of 0.7090. The calculation for this would be:
- (1/currency quote) x purchase amount
- 1/0.7090 x $10,000
- 1.4104 x $10,000 = $14,104
The investor would have to pay $14,140 AUD to receive $10,000 USD.
But if the AUD/USD currency pair was 5 pips lower at 0.7085, the number would be different:
- (1/currency quote) x purchase amount
- 1/0.7085 x $10,000
- 1.4114 x $10,000 = $14,114
At this quote, the investor would have to pay $14,114 AUD to receive $10,000 USD. In this case, the movement of 5 pips, the smallest unit of measurement, changes the value by $10.