Reading an FX quote
An FX quote is a price for one unit of the first currency, paid in the second. That sentence settles which side a client deals on, what a pip is worth, and how to turn a quote round.
- Say which side of a two-way price a client deals on, and how much of the quote currency changes hands
- Value a pip on a notional, in the quote currency and in dollars
- Read the size of a move off a P&L
- Invert a two-way quote, and cost a round trip on a wider spread
The intuition
EUR/USD at 1.0850 / 1.0852 means one euro costs between 1.0850 and 1.0852 dollars. The euro is the thing being bought and sold; the dollar is the money. The dealer buys euros at 1.0850, its bid, and sells them at 1.0852, its offer. A client always deals on the side that is worse for them: buying euros at 1.0852, selling at 1.0850. On €10 million, buying costs $10,852,000.
A pip is the smallest standard step in the price, 0.0001 for most pairs and 0.01 for yen pairs. Because the quote currency is the money, a pip is naturally worth notional × pip size in that currency: €10 million × 0.0001 is $1,000 for EUR/USD, and $10 million × 0.01 is ¥100,000 for USD/JPY, which is about $667 at 150. That is why a EUR/USD pip is worth the same in dollars every day and a USD/JPY pip is not. Turn a quote round and the sides swap: the bank's bid for euros is its offer for dollars.
BASE/QUOTE is quote-currency units per one unit of the base. The client buys the base at the offer and sells it at the bid. Quote-currency amount = base notional × rate. Pip value = notional × pip size, in the quote currency; divide by the rate to get dollars when the dollar is the base. Inverted quote: bid = 1 ÷ old offer, offer = 1 ÷ old bid. A round trip costs the full spread once.
Why it works
- The conventions here: BASE/QUOTE, shown bid / offer. The bid is where the bank buys the base, the offer where it sells it. A pip is 0.0001, or 0.01 for yen pairs. Notional is in the base currency. Pip values are converted to dollars at the mid when the dollar is the base. A round trip costs the full spread.
- Base is the good, quote is the money. In USD/JPY the dollar is being priced, in yen. In EUR/USD the euro is being priced, in dollars. Every other rule follows from asking which currency is the good.
- Why the client gets the worse side. The bank's bid is the lower number and it is where the bank buys, so a client selling the base receives the lower number. Its offer is the higher number and where it sells, so a client buying pays the higher one. The spread is the bank's compensation for standing there.
- Pip values. Notional × pip size lands in the quote currency. For dollar-quoted pairs that is already dollars. For USD/JPY, USD/CAD and USD/CHF the P&L lands in the other currency and converts at the rate, so a pip is worth a different number of dollars as the rate moves.
- Inverting. Buying the quote currency with the base is the same trade as selling the base for the quote. So the inverted bid is one over the old offer and the inverted offer one over the old bid: invert both numbers and swap them.
- Run it backwards. A dollar P&L divided by the dollar value of a pip is the move in pips. Only percentages compare across pairs; pips are a convenience.
| Client buys €10M: deals at the offer | pays $10,852,000 |
| One EUR/USD pip on €10M: 10,000,000 × 0.0001 | $1,000 |
| One USD/JPY pip on $10M: 10,000,000 × 0.01 | ¥100,000, about $667 at 150.01 |
| Round trip on EUR/USD, 2 pips wide | $2,000 |
| EUR/USD turned round, USD/EUR bid: 1 ÷ 1.0852 | 0.92149 |
| USD/EUR offer: 1 ÷ 1.0850 | 0.92166 |
The formulas
Always the side that is worse for the client.
How much money changes hands.
The P&L lands in the quote currency.
Invert both numbers and swap them.
Buy at the offer, sell at the bid: the whole spread once.
Worked example
Notional times pip size in the quote currency, converted to dollars if the dollar is the base, then times the move. The follow-up asks whether that is exact for a large move.
See it move
Pick a pair, which way the client deals, the notional, how wide the market is and how far it moves.
- Switch the client from buying to selling. The dealt rate drops from the offer to the bid and the quote-currency amount falls with it; the pip value and the P&L do not move.
- Raise the notional. The pip value, the P&L and the round-trip cost all scale in proportion.
- Widen the spread. Only the round-trip cost rises, one pip value per pip.
- Change the pair and watch the pip value: for a dollar-quoted pair it is notional × 0.0001 in dollars directly; for USD/JPY it is notional × 0.01 in yen, converted at the rate, and for USD/CAD or USD/CHF the same in their currency.
Run it backwards
A trader long a stated notional made a stated dollar amount. Roughly how many pips did the rate move?
Work out what one pip is worth in dollars on that notional, then divide the P&L by it. For a dollar-quoted pair the pip value is notional × 0.0001; otherwise divide by the rate as well.
Then translate to a percentage: pips × pip size ÷ rate. Pips are a convenient unit inside one pair, but only percentages compare a yen move with a euro move.
Traps
Say it in the interview
“EUR/USD is 1.0850 / 1.0852. A client wants to buy €10 million. Walk me through it.”
Check yourself
5 fresh questions, with new numbers. Answer each one correctly to finish the chapter. Get one wrong and you will see the full working, then you can try it again with new numbers.
Answers within 1% are marked right. Type the number; $, %, x and M are fine. First tries count toward Learned: the topic is Learned once every chapter is done and 75% of first tries were right.
- The first currency is the good, the second is the money. The client buys the base at the offer and sells at the bid.
- Pip value = notional × pip size in the quote currency; convert at the rate when the dollar is the base.
- Invert both numbers and swap the sides.
- A round trip costs the full spread once; only percentages compare across pairs.