Nickel: What It is, How it Works, Example

What Is a Nickel?

The term “nickel” has various meanings depending on the context. In the financial markets, nickel is a slang term referring to five basis points, which is equivalent to five one-hundredths of a percentage point (0.05%). In the commodities markets, nickel is a type of base metal, whereas in everyday language it refers to a five-cent U.S. dollar (USD) coin.

Traders use the term nickel to refer to a small change in some underlying instrument, such as an interest rate of a currency pair. Although this type of minute change might seem insignificant, it can have a large effect on institutional traders who are investing significant sums.

How Nickels Work

Oftentimes, traders use leverage and complex trading techniques to profit from small changes in the value of the assets they trade. For instance, currency traders will hope to profit from slight shifts in the value of a currency pair, whereas derivative traders might seek to profit from even minor shifts in interest rates. Rather than continuously referring to specific percentages, traders use shorthand language to refer to these small changes more easily. “Nickel,” for instance, is shorthand for a 0.05% change.

Another area where this shorthand is used is when traders and other market participants are speculating about the potential interest rate changes made by a central bank. In this context, small changes in interest rates can have a large effect on the prices of virtually all financial assets, since the interest rates set by the central bank are often used by investors when determining the discount rates used to value their investments. For this reason, rising interest rates would generally cause the price of financial assets to decline, whereas falling interest rates would cause them to rise. A one-nickel change in interest rates might therefore have a large effect on the price of various assets.

Traders sometimes also use the term “nickel” when evaluating the potential profit or loss they expect to sustain on their positions. For example, a trader might estimate the impact on their position that would be caused by a one-nickel rise in interest rates. These types of calculations can be useful as a type of sensitivity analysis, helping traders understand how resilient their investments would be to various external changes that might occur.

Real World Example of a Nickel

In the foreign exchange markets, traders can calculate the financial value of a one-nickel change by dividing five basis points—that is, 0.0005—by the exchange rate of the currency pair they are trading. The trader would then multiply the resulting number by the amount of money they wish to invest.

For example, suppose the trader wishes to trade the USD/EUR currency pair. If the USD/EUR exchange rate is $1.30 and the trader wants to invest $100,000, then a one-nickel move would be worth $38.46. This type of quick calculation can help traders understand the range of potential profits or losses that they would expect to sustain depending on how prices evolve.