- Once as EUR/GBP
- And also as GBP/EUR
So, mathematically, we can take advantage of the closeness of the two currencies euro and british pound. But it’s not very clear how. Let’s assume as an example that the quotations are 0,8 (for EUR / GBP) and 1,25. Obviously, the product of those two figures is constant is equal to one.
Trying to use numbers
For example, we buy 1 lot or EURGBP at 0,8 and 1 lot of GBPEUR at 1,25
- If GBP progresses : is worth 1,26, euro = 0.79365079
- If GBP regresses : is worth 1,24, euro = 0.80645161
In fact let X be the ratio EUR/GBP (here 0,8). A small variation (around 100 pips) of the GBP strength, induces a variation of EUR in the other way, multiplied by X²
This leads to, with our two lots :
- If GBP progresses : gain of 100 pips in EUR and loss of 63,5 pips in GBP
- If GBP regresses : loss of 100 pips in EUR and gain of 64,5 pips in GBP
At first, we thought that all of this would lead to a gain of 1 pip : 100 – 100 + 64,5 – 63,5
But in reality, the 63,5 pips of losses are denominated in a higher GBP currency than the 64,5 pips of gain… all in all, their real values, in the same currency, are the same, and you can’t earn anything with this method.