Typically, one of the currencies is the US dollar. The price of a future is then in terms of US dollars per unit of other currency. So the value of one is reflected through the value of another. The base currency is to the left of the pair and the quote currency is to the right. By dividing the raw notional values of two products, we get a ratio that shows the dollar value ratio controlled by the products. This will give us our tradable ratios for contract size. In order to place an inter-market spread, it is necessary to derive the so-called “spread ratio.” The spread ratio is an indication of the ratio or number of futures that must be held in the two markets to equalize the monetary value of the positions held on both legs of the spread
Because each contract has a different expected move and daily range, we can use implied volatility (IV) to determine the IV-adjusted notional ratio.
This is the often is the preferred method.
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