Example of strategy using made up numbers

Euro bid/ask: 1.50/1.51
Cable bid/ask: 2.00/2.01

Market moves, Euro increases more than Cable:

Euro Bid/Ask: 1.60/1.61
Cable Bid/Ask: 2.05/2.06

so if euro was over valued in relation to cable, I would go short euro and long cable creating:

Euro: ($100)
Usd: $160

Gbp: $77.66
Usd: ($160)


Momentum hits cable as USD is being sold off, rates become:

Euro bid/ask: 1.63/1.64
Cable bid/ask: 2.20/2.21

So your position becomes:

Euro: ($100)
Usd: $163.00

Gbp: 77.66
Usd: ($171.63)


you would then cover your position creating:
Euro: $100
Usd: ($164.00)

Cable: ($77.66)
Usd: $170.85

Profit in USD including theoretical spreads being: P=170.85-164.00 =$6.85

Now to calculate margin requirement so that you can calculate RoR %:

Leverage: 10:1
Euro Margin (EM) : $16.50
Cable Margin (CM): $16.50
Profit (P) = 6.85
RoR (%) = [P/(EM+CM)]*100
Thus:
RoR = [6.85/33.00]*100
Ror = 20.76%



Now biggest Item would be how to price one in relation to the other so that it is possible to spot these type of positions...

Time to goto the Library!