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TRAVELERS' LETTER OF CREDIT

233

looked up. The draft is drawn for enough pounds to equal about 500 francs. The banker keeps the draft to send to London, indorses the payment on the letter, and returns it with the traveler's money. If the draft exhausts the letter, the latter is kept by the banker. The London bank compares the signatures, charges the American bank's account and forwards the draft to that bank. Letters payable in New York are used similarly.

There are three ways of securing such a letter of credit. The traveler may pay in advance for his credit at the current bankers' rate of exchange, plus a commission. If any of the credit is not used it is bought back on the traveler's return. Collateral security for payment on return may be deposited. Every draft as it comes for payment is charged at the day's current bankers' rate. A commission and interest for thirty days, the approximate time from the date of the draft to when the foreign banker is repaid, are added. Some responsible party may guarantee that each draft plus the commission and the interest as above will be paid on its arrival.

CHAPTER XV

COST OF FINANCING FOREIGN SALES BY

BILLS OF EXCHANGE

166. The terms of sale. The terms of delivery must be clear as to whether the buyer or seller is to pay the cost of packing, cartage, railway freight, ocean freight, lighterage, wharfage, marine and fire insurance, customs duties, consular fees, fees of customs officials and brokers, fines, and special fees. Trade customs vary greatly. A misunderstanding may cause the loss of all profit. The terms of payment embrace the time, method, and money of payment, and upon whom the charges of interest, if any, and collection are to fall. Trade in many parts of the world is in both directions between the same people. open account arrangement is then the most practical, for hardware, cotton goods, and machinery pay for coffee, rubber, or tea, and only the differences need to be settled at regular intervals.

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167. Effect of exchange rates on price. When payment is to be made in any money except U. S. dollars, the rate at which that money is to be converted into dollars is important. It must be remembered too that ninety-day exchange is converted at a lower rate than sight bills. Differences in the exchange rate may produce as much as 1% difference in the invoice, so that rate should be obtained before a price is quoted. If an importer wishes to buy cotton goods to the amount of £10,000, they will cost $48,500, or $48,800 according as exchange is $4.85 or $4.88 a pound. If a St. Louis merchant offers his goods at £10,000, when exchange is

QUOTATION OF EXCHANGE RATES

235

$4.88, he will realize at delivery $300 less if exchange should fall to $4.85. The seller or the buyer has no risk of exchange only when he gives or gets a price in his own money. To insure against fluctuations in the price of exchange the seller (drawer of the bill) obtains from a banker a guarantee of the price he shall receive for his bill when he offers it; the buyer of goods secures the guarantee of the rate at which he shall pay the bill. In other words the banker is asked to buy, or sell, exchange for future delivery. When the rates are already at a high, or low, limit, it is known that any change must be in the other direction.

168. The quotation of exchange rates. Rates are actual, or posted. Actual rates are those made on large transactions; posted rates are those quoted to small buyers and sellers. One may be said to be wholesale, the other retail. There are two methods of quoting rates, direct and indirect. In the direct method the quotation is so many home units for one foreign unit, as $4.8665 for an English pound, or so many cents for a ruble, a crown, or a peso. In the indirect quotation one is offered so many foreign units for a home unit, as a number of francs, or a number of lire, for a dollar. In the United States the direct method is now used for quoting exchange rates. The rate is expressed as the number of our cents required to purchase a foreign unit. The rates given below are quoted from the New York Times of May 11, 1923. The quotation on sterling represents dollars and decimals of a dollar; all others represent cents and decimals of a cent.

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CHINA

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day. day. Ago.

Cents per silver dollar for Hongkong;

per tael for Shanghai and Peking.

Ago.

Hongkong:

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Demand

Cables

74.37 74.62 75.00 78.25
74.50 74.75 75.125 78.50

INDIA- Calcutta; Cents per rupee, nominally sta

bilized at one-tenth of a pound sterling.

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Demand

Cables

36.03 36.03 36.45 36.31
36.08 36.08 36.50 36.375

BRAZIL Par 32.45 cents per paper milreis.

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MONTREAL-Par 100 cents per Canadian dollar.
Demand ... 98.03 98.03 98.06 98.70

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