2. Another operation closely related to the above is where Ba draws long bills on Be, sells the bills, and loans the proceeds, not so much, if at all, to take advantage of differences in the market rates of interest in New York and London, as to take advantage of the high rate of exchange then prevailing and promising to fall. By selling the drafts at the high rates today and buying sight or cable exchange later to cover, the difference constitutes profits. This is a short sale of exchange and has the effect of stabilizing exchange rates and minimizing the shipment of gold.
3. Another use of finance bills is to carry securities during a slump in the market. If Ba has bought a block of securities as earning assets, using funds which would otherwise be idle at that time, but later, when he needs the funds for commercial uses, he finds the market for the securities has slumped, a common way of procuring ftmds to carry the securities is to draw long bills on Be and sell them. If the security market has not improved when these bills mature another batch is issued, the proceeds of which are used to pay the maturing batch; obviously the new batch must be for a larger amount than the first, since the discounted value of the second must equal the face value of the first. The
securities so carried may be used as collateral for the bills. When the security market recovers, the securities may be liquidated and the finance bills retired.
4. Speculative operations on the stock exchanges are often financed through finance bills under joint account. Ba, seeing an opportunity to buy some securities for a rise in price, but hav ing no available funds for the purpose, may induce Be to share in the speculative operation. Ba draws long bills on Be, sells the bills and uses the proceeds to buy the securities. He holds them until the market rises in accordance with his expectations, sells the securities and buys demand or cable exchange to cover the long bills, which meanwhile have been accepted by Be and sold to De. De has been the real creditor. Ba divides the profits, if any, on the operation, with Be. If there is. a rise in the price of the securities and a fall in the exchange rates, profits result therefrom; if one or both of these prices move the other way, the profits will be reduced, and even a loss may be suffered.