EXCHANGE OPERATIONS. 235 or selling bills on other places to be transmitted to or from the foreign place for the purpose of being sold or bought therein or in the country of the debtor. 4. A merchant may also pay his debt abroad by sending gold to gold-using countries, or silver to India, China, Japan, &c. He can also send international securities to be sold abroad. 10. Exchange operations. These consist of direct exchanges, cross exchanges, and indirect or arbitrated exchanges. Direct exchanges are operations between two countries based on their rates of exchange without the intervention of a third place. These are naturally the most common operations between any two places. Cross exchanges are the direct exchanges between two places considered with regard to a third place. Indirect exchanges or arbitrations of exchange are operations between two countries through the medium of one or more countries, and the rates are spoken of as arbitrated rates of exchange. These rates are called simple or compound according as there is one place intervening or more than one and the operations are called simple or compound arbitrations. This may be expressed by saying that arbitrations of exchange are simple or compound according as they are based on one or more cross exchanges. The distinction between simple and compound arbitrations is sometimes stated thus-A simple arbitrated rate is one calculated through a place intervening with direct paper, whereas a compound arbitrated rate is one calculated through a place intervening with indirect paper. Compound arbitrations are also called circuitous when three or more places intervene a very rare case. The object of an indirect exchange is to obtain a better rate for remitting or drawing than the direct rates give, and the object of comparing several arbitrated rates is to find the best rate of all. A foreign rate is one expressed in foreign money—a sterling rate is one expressed in sterling money. A short price is the price of a bill at sight, or at short sight, which is generally 3 days' sight. In speaking of operations with indirect paper they are said to be made through the intervening place. Two courses are open, (1) to remit direct paper to the intervening place with instructions to forward the proceeds to the final place, or (2) to remit direct paper to the intervening place and send instructions to the correspondent at the final place to draw upon the intervening place. The same rate is produced but the second is the less complicated mode, and it is also attended with fewer charges. 11. Direct Remittances. The most natural and therefore the most usual way of paying any foreign debt is to obtain a bill of exchange from a banker or in the market, and directly remit it to the creditor abroad. Such bills are frequently drawn in the currency of the foreign country, but if in sterling they must bear the words "exchange as per endorsement "being endorsed with the current rate of exchange of the date of the bill. The cost of such a bill is easily calculated. Example. 18752·64 fl. (Austrians) due in Vienna at 12:07, 3 mos., rate of discount 2 p. c. 18752-64 fl. at 12:07 3 mos. will cost £1553.657 7.768 REMITTANCES AND DRAFTS. EXAMPLES. (Brokerage 1 p.m., Bill-stamp p.m.) 1. 15000 francs at 25.21. 2. 7865 marks at 20.53, 3 mos., discount 2 p.c. 3. 8645 Dutch florins at 12:31, 3 mos., discount 3 p.c. 237 Further remittances are given under each country. 12. Direct Drafts. Another method of payment almost as common as that of direct remittances is for the creditor to draw a bill of exchange upon the debtor-sending one of the set to him for acceptance and negotiating the other at once. Such bills are sometimes in the currency of the creditor's country and thus often bear the words exchange as per endorsement," especially in the case of bills drawn in £ sterling. The value of such a bill is easily calculated, as also the cost to the debtor. Example. £824. 7s. 10d., 3 mos., Discount 2 p.c. Endorsed 25.18. 1. £712. 188. 4d., 3 mos., 24 p.c., 25.19 (France). 2. £320. 78. 8d., 3 wks., 4p.c., 20:40 (Germany). 3. £1000, 3 mos., 3 p.c., 97·60 (Russia). 4. £415. 12s. 8d., 60 days, 3 p.c., 4·874 (U. S.). 5. £1826.9s. 7d., 4 mos., 24 p.c., 3/10 (China). Further drafts are given under each country. 13. Exchanges and Multiples. The method of multiples lends itself specially well to the calculation of exchanges, as decimals are always employed. The variations in the quoted exchanges are within such narrow limits that it is a very simple matter to construct tables which may cover all the rates arising for each country. Construct the multiples corresponding to the following rates: (1) 25-291, 3 mos., (France), (2) 20:48, 3 mos., (Berlin), (3) 12.19, (Amsterdam), (4) 11.98, (Vienna), (5) 391, (Spain), (6) 411, (Portugal), 3 mos., and use them to obtain cost of bills for 8560 francs, 12150 marks, 3575 30 Dutch florins, 4560 Aust. florins, 3560 pesetas, 8000 milreis, respectively. Discount is to be taken at 4 p.c. where necessary. THE DOUBLE RATES. 14. Comparison of Direct Rates. 239 Between any two places there are in general always two distinct rates. Thus between London and Paris there is the London rate on Paris and the Paris rate on London. These may be short or long rates: if short they are always tending to equality, but if they are long rates their difference increases with the time and the rate of discount. Also the two rates differ frequently in the method of quotation, and therefore in order to compare them a calculation has to be made. The necessity for comparing the two direct rates between two places is constantly arising in business. For the payment of any debt the question whether it will be cheaper to remit bills or to instruct one's agent abroad to draw upon us is always of importance. Rules and Principles. 1°. Reduce the direct rates to short prices (if necessary) by adding or subtracting interest for the times of the quotations at current rate of discount allowed at each place-afterwards changing them so as to be quotations of the same kind. There are two reasons for this. (1) The interest for the time a bill has to run affects the price in direct operations-acting in opposite ways upon the two rates when of the same kind or in the same way when of opposite kinds. (2) In indirect operations the arbitrated rates are for present money, as bills are never sold for credit. It will be seen how closely direct and indirect rates are connected as we proceed. The interest is added or subtracted in accordance with these laws: (1) If A have a foreign rate and B a sterling rate -the interest must be taken from A's rate and added to B's. |