METHODS OF QUOTING EXCHANGE

The rate of exchange or the price of foreign exchange may be quoted in various ways. Thus, in expressing the value of sterling it is said to be worth $4.8665. This is known as the direct method of quoting exchange, since it indicates the number of home units (dollars) payable for one foreign unit (sterling). Conversely, according to the par of exchange, 5.1826 francs are worth one dollar. This is an indirect quotation, since it expresses the number of foreign units (franc) which can be commanded by one home unit (dollar). Any commodity may be quoted by these two methods. Thus, if one bushel of wheat is worth two dollars, obviously one dollar is the equal of one half bushel of wheat. However, the market prices of most goods, whether wheat or cotton, stocks or bonds, are all quoted in terms of dollars to simplify calculations. For many years the market prices of foreign exchange were quoted in both the direct and indirect methods, but in 1920 the dealers in the New York market agreed to employ only the direct quotation and in consequence all rates are expressed in terms of dollars and cents.

In addition to the direct and indirect methods, exchange may also be expressed by the discount and premium method. It is most effectively employed between two places or countries having the

same monetary unit. For example, one may read in the papers that domestic exchange on Chicago is selling in New York at a discount of ten cents, which statement means that New York banks will sell a sight draft for $1000 against their accounts with Chicago institutions at $999.90. Conversely, one may observe that on a certain day Canadian exchange is at a premium quoted at one per cent. Since Canada uses the dollar with the same mint par as the American monetary unit, a draft drawn by the First National Bank of Boston on the Toronto office of the Royal Bank of Canada will include this differential, and will amount to $1010. In similar manner the premium and discount method is used in quoting rates between France and Italy, which employ the franc, and between England and Australia, both of which are on a sterling basis.

In recent years there has been a change in the method of indicating the progressive fluctuations in rates. For a long time this progression was expressed by fractions, so that when bankers wished to define the rate of sterling more sharply, they would quote it at $4.86, 4.851, 4.851, 4.85, 4.85. To-day progression in most rates is carried out in decimals.

Quotations on foreign exchange are to be found on the financial page of the daily newspapers, and complete reviews of the market are given in the

weekly publications on business conditions. A comparison of the rates given by the newspapers of the same day will often show wide variations. Such discrepancies never arise in the prices of securities on the New York Stock Exchange. The high, low, and closing prices of all securities are recorded uniformly in all papers, since they are reporting transactions of a single organized market. As foreign exchange is bought and sold in an unorganized market, where no official records of dealings are kept, each newspaper must therefore obtain quotations from some large financial institution. The nearest approach to an official set of quotations on foreign exchange is issued daily by the Federal Reserve Bank of New York, which under the emergency tariff of 1921 is required to report each day the buying rate in New York for cable transfers on all important countries. Although the Bank under the Federal Reserve Act is permitted to buy such cable transfers, this power has never been exercised and it must obtain the quotations from dealers in the foreign exchange market.

CLASSES OF QUOTATIONS

In any market there are always two prices, the bid price offered by buyers and the asked price demanded by sellers. In the foreign exchange market the former is known as the buying rate at which a bank or dealer is willing to purchase bills

drawn on a certain country, and the latter is known as the selling rate. Thus the bid and the asked price, or the buying and the selling rate of a bank for, say, Belgium francs, may be quoted at 5.95 and 5.98 respectively. The difference between these two quotations is known as the spread and represents the bank's margin of profit on transactions in this currency when negotiated simultaneously.

On the stock exchange the same price is quoted for all transactions, whether large or small, except odd lots, and an investor may purchase one hundred shares of American Telegraph and Telephone stock at the same price as a buyer of one thousand shares. On the foreign exchange market the rates vary with the size of the transaction and the relative importance of the individual buyers and sellers. For large dealings in foreign exchange or for business houses with valuable accounts, banks quote what is known as an "actual" or wholesale rate, which is more favorable to the buyer or the seller than the "posted" or retail rate for smaller orders. Both the posted and actual quotations are known as "firm" rates, since they are real offers at which the bank is willing either to buy or sell. A bank also quotes "service" rates, which do not constitute true offers but are given over the telephone or in a printed bulletin merely for the benefit of customers desiring information on the general trend of the market.

FACTORS DETERMINING RATES ON VARIOUS CLASSES OF BILLS

The value or market price of foreign exchange, like any other commodity, is not constant but variable. One important factor in determining the rates on the various classes of bills is the element of time. As the period of time between the drawing of the exchange and its payment is lengthened, the beneficiary is that much longer without the use of the funds and so loses a corresponding amount of interest. Conversely, as the maturity of foreign exchange bills is shortened, the funds are so much less available to the seller, who therefore charges a proportionately high rate. Consequently the rate on cable transfers is higher than that on sight drafts, which in turn cost more than sixty- or ninetyday drafts.

There is a difference of opinion as to whether the cable transfer or the sight draft is the basic or standard rate which determines all other rates. Some writers regard the cable transfer rate as the real exchange rate, on the ground that it involves no element of interest and so expresses the exact relative value of the various foreign exchanges at any one time. This view is taken by most foreign exchange traders but the opposite opinion is held by such writers as Furniss Foreign Exchange (page 85), and Whitaker Foreign Exchange (page 273). The