notices of the rates of exchange. They apply to bills for small amounts and actual sales of large bills may vary considerably from these posted rates. The bills of houses enjoying high credit generally command a better price than others. The price of time bills is affected by the rates for money at the foreign center because they are remitted for acceptance and usually discounted at the prevailing rate there. Bankers' long bills drawn at sixty and ninety days' sight may be divided into three classes: (1) long bills drawn in the regular course of business; (2) long bills issued in the operation of lending foreign money; (3) finance bills. Bankers engaged in the foreign exchange business are constantly called upon to supply customers with bills drawn at sixty and ninety days' sight. Take, for example, the case of a New York importer who has an obligation maturing in London in two months but who has the money on hand and wants to pay it now. Instead of sending demand sterling, that is, a demand draft on London, and getting a rebate of interest for the sixty days, he will more likely send a sixty days' sight draft, the cost of which will be considerably less than a demand draft. The great proportion of bankers' long bills arise from the lending of money in foreign financial centers. European bankers keep millions of dollars loaned out in the New York market. Bankers' long bills are created in the making and renewing of these loans and find their way into the exchange market.1 119. Finance bills. The third kind of bankers' long bills are finance bills. A finance bill is a draft drawn by a banker in this country on a foreign banker for the purpose of securing funds here for the time being, and with the intention of meeting the draft at maturity by the purchase of demand sterling. American finance bills are drawn at thirty, sixty, or ninety days, and usually are not covered by collateral security. The foreign banker who accepts these drafts becomes, as it were, an accommodation in1 For a full discussion of this subject, see Escher, pp. 83-94. dorser, and is responsible for their payment at maturity if they are not made by the drawer. Naturally, therefore, only the best houses with strong foreign connections and high credit can float such bills. The drawee bank charges a commission for accepting the bill varying from 1/16 to of 1 per cent, according to the tenor of the bill, the financial responsibility of the drawer, and the character of the security if the bill is covered. The conditions under which it is advantageous for the banker to raise funds by drawing finance bills vary with the season of the year and other factors. Primarily, of course, the use of the finance bill is based upon the idea that the banker can borrow funds abroad where money is cheap and lend them at home at a higher rate. But the condition of the exchange market is always a prime consideration. After the banker sells his finance bill at ninety days the operation is only half completed. When the bill matures he must buy sight exchange and send it to his correspondent to meet the bill. His profit depends then to a great extent upon the price at which he is able to "cover,' that is, purchase sight exchange to meet his maturing finance bill. In the summer months money is apt to be low and exchange high, but during the fall and early winter when exports are moving out in great volume there is a plentiful supply of bills, and at that time bankers, who have put out bills in the summer, can generally purchase sight exchange at a low rate to cover their maturities. In calculating the profit made in the handling of finance bills there is on one side of the balance the proceeds from the sale of the ninety-day draft, which will be close to the face of the draft as the discount rate in England is low, plus the interest received from the loaning of the proceeds; on the other side is the price paid for demand exchange at the end of the ninety days plus the commission charged for acceptance by the foreign banker. There is a strong element of speculation in the handling of finance bills, but it affords opportunity for large profit and many of the big exchange bankers engage in it. 120. Arbitraging.1-Arbitraging in exchange may be briefly defined as the purchase of exchange on one country through another country. Thus, for example, when exchange on Paris is more plentiful in London than it is in New York, an exchange banker in New York needing a draft on Paris may be able to buy it cheaper in London than at home. The following example will illustrate a simple arbitraging transaction. A banker in New York sells a draft on Paris for 25,250 francs. The rate is 5.17 (5 francs 17 centimes to the dollar), so that he realizes on the sale $4,879.23. Cabling to London he finds that the rate there on Paris is 25.25 (£1=francs 25.25). It will therefore take just £1,000 to buy the francs 25,250 he needs. Sterling exchange is selling at 4.84. He decides to buy a draft on London for £1,000, costing him $4,840, and sends it to London with instructions to his correspondent to buy with it a bill on Paris for francs 25,250 and to send it over to Paris to the credit of his account. By this triangular arrangement he has been able to sell to his customer a draft on Paris for $4,879.23 and to provide funds there to meet it at a cost of $4,840. Speaking of exchange arbitration, Escher says: "Experts do not confine their operations to the main centers, nor is three necessarily the largest number of points which figure in transactions of this sort. Elaborate cable codes and a constant use of the wires keep the up-to-date exchange manager in touch with the movement of rates in every part of Europe. If a chance exists to sell a draft on London and then to put the requisite balance there through an arbitration involving Paris, Brussels, and Amsterdam, the chances are that there will be some shrewd manager who will find it out and put through the transaction. Some of the larger banking houses employ men who do little but look for just such opportunities. When times are normal the margin of profit is small, but in disturbed 1 For full discussion of arbitraging, see Margraff: International Exchange, Ch. XXVI. 2 Escher, p. 98. markets the parities are not nearly so closely maintained and substantial profits are occasionally made. The business, however, is of the most difficult character, requiring not only great shrewdness and judgment but exceptional mechanical facilities.1 121. Dealing in futures.-The dealing in contracts for future delivery of exchange arises from two broad classes of operations. Bankers who buy and remit to their foreign correspondents large amounts of exchange, including both acceptance and payment commercial long bills, frequently sell their own demand drafts for future delivery, trusting that the payments under rebate on payment commercial bills will be sufficient to meet them. "Not infrequently good commercial payment bills can be bought at such a price and bankers' futures sold against them at such a price that there is a substantial profit to be made." Bankers' futures are sold also not against remittances of commercial bills but against exporters' futures. An exporter who desires to quote a price to a foreign customer on merchandise to be shipped three months hence must know what he can get for his drafts at that time. The banker will quote him a rate somewhat higher than he calculates he may be able to sell his own draft at that future date. The exporter knows exactly what he will realize on his exchange for future delivery; the banker takes a chance on the future condition of the exchange market. 122. Letters of credit.-Letters of credit issued by bankers to their customers are of two kinds: travelers' letters of credit and commercial letters of credit. The demand for letters of credit by the great and increasing number of Americans who travel in foreign countries is so large that many banks as well as private bankers now issue them. A letter of credit is a credit letter addressed to the correspondents of the issuing bank introducing the holder, certifying that he is authorized to draw a certain sum of money, and requesting that his drafts be honored up to that amount. A list of the foreign correspondents is 1 Escher, p. 101. |