Expert: Gina Boykin - 10/14/2008

Question
Hello:

I read that to determine the value of one pip, divide 0.0001 by the exchange rate.

For example, If the EUR/USD is 1.2345, divide one pip 0.0001 by 1.2345.

Why is this done since the 1/10,000 place in the rate of 1.2345 has the value of 5/10000 of $1.00?  

I thank you for any helpful explanation that may be sent to me.

Answer
I don't think I can explain why the formula is the way it is, but it does work.  

In your example, the calculation of .0001/1.2345 gives you the value of 1 pip in terms of Euros because the Euro is the currency that is stated first.  If you want to know the value in dollars, you have to take it a step further.  You have to divide the end result by the exchange rate.