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I'm new to FX derivatives and I'm trying to price a derivative of USD - JPY pair at 450 pips below spot for USD - JPY. Let's assume that the spot is 109.36; would this mean that 450 pips below spot is 109.36 - 0.045 = 109.315?

If this is incorrect, please help me understand the intuition behind pips. I understand that 1 pip is 0.0001 of a movement in spot.

ameyashete
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  • What specifically do you price? A pip in JPY is usually 0.01. In options you would not say pips below spot - it is just a cost like you see here. 450 JPY pips per EUR would be 4500 JPY if EUR notional is 1Mio. In forwards, usually you quote in points, not pips. – AKdemy Jul 05 '21 at 13:55

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For most currency pairs, 1 pip is indeed 0.0001; however, because USD 1 $\approx$ JPY 100, in this context, 1 pip is larger, i.e. 0.01. So 450 pips is 4.5, and 109.36 - 4.5 = 104.86.

You may find this discussion How is forex price precision (of the actual floating point number) determined? useful.

Dimitri Vulis
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  • Great, thanks. This is exactly what I've been looking for.

    Now, in the case of USD - INR, how would you find what 450 pips represents? Since 1 USD is approx = 71 INR, the math for pips is not as straightforward as in USD - JPY where it is simply 0.01.

    Could you explain the intuition behind the calculation for finding which decimal place the pip will be in the USD - INR case?

     – ameyashete Jul 05 '21 at 17:47
  • Yes indeed USDINR pip is also 0.01. It is usually quite logical, but you should find your desk's lookup table. – Dimitri Vulis Jul 05 '21 at 19:10