The term “basis point” originates from the “basis” of the transaction or the difference between two interest rates. The basis point is a unit of measurement for the change in interest rates of bonds and bills. Basis points are commonly used in calculating interest rates, exchange rates, and stock prices.

A basis point is defined as “zero point and one hundredth” (0.01%) or “one hundredth of a percentage point”. To put it simply: one hundred pips equals one percent; ten thousand pips equals one percent. When comparing percentages, in addition to percentages, the slight difference between two percentages can also be expressed in pips. For example, the difference between 7.96% and 7.91% is 0.05%, which is a difference of 5 points.

For example, the interest rate of a floating-rate bond may be 10 basis points higher than LIBOR, and 100 basis points is equivalent to 1%. The interest rate of the bond may be 0.1% higher than the commonly used LIBOR interest rate; when the Federal Reserve announces that it will cut interest rates by 50 basis points, This is equivalent to a decrease of 0.5%.

It is worth noting that, in accordance with market practice, the exchange rate quotes usually consist of “4” and “2” after the decimal point. However, in recent years, many foreign exchange dealers have introduced a foreign exchange rate notation that includes significant figures “5” and “3” after the decimal point. The “5” and “3” after the decimal point are called decimals, that is, one tenth of BPS. For example, if the euro-dollar exchange rate changes from 1.21600 to 1.21601, the euro-dollar exchange rate will rise by 1 basis point.

According to the foreign exchange market, the price of the foreign exchange rate is usually composed of 5 significant figures. For example, on January 16, 2019, the central parity of the RMB against the US dollar was 6.76150. The smallest unit of renminbi is the cent, and 1% of the smallest unit, or 0.01 cent, is called 1 basis point.

One basis point in the interest rate represents 0.01 percentage point, 100 basis points represents 1 percentage point, and one ten thousandth in the exchange rate is a basis point. The price after the exchange rate change minus the price before the exchange rate change multiplied by 10,000 is the basis for the exchange rate change. Points.

What is the exchange rate basis point?

According to market practice, the quoted price of foreign exchange rates is usually composed of 5 significant digits, 1 digit before the decimal point and 4 digits after the decimal point. Take the RMB against the U.S. dollar as an example. On February 22, 2018, the central parity of the RMB against the U.S. dollar was 6.3545, that is, 6.3545 RMB to 1 U.S. dollar. The smallest unit of renminbi is the cent, and 1% of the smallest unit, or 0.01 cent, is called 1 basis point.

One basis point in the interest rate represents 0.01 percentage point, 100 basis points represents 1 percentage point, and one ten thousandth in the exchange rate is a basis point. The price after the exchange rate change minus the price before the exchange rate change multiplied by 10,000 is the basis for the exchange rate change. Points.

How to calculate the base point value of foreign exchange rate?

Here are some examples to illustrate (here we use the standard “4” and “2” bit notation).

  1. When the U.S. dollar USD is used as the basic currency in a currency pair, the calculation formula of 1 foreign exchange base point value is as follows: Foreign exchange base point value = .0001÷ currency pair exchange rate For example: USD/CHF exchange rate is 1.2020, then USD/CHF The value of a basis point of the pair =.0001÷1.2020=0.0000819 The exchange rate of USD/JPY is 123.15, then the value of a basis point of the currency pair USD/JPY=.01÷123.15=0.0000812
  2. When the U.S. dollar is used as the relative currency in a currency pair, such as: AUD/USD; GBP/USD; EUR/USD, the value of 1 basis point is approximately equal to: 0.0001.