By buying when the rate is low he increases the demand and tends to raise the rate, and by selling when the price is high he in creases the supply and tends to lower the rate. The effect, therefore, of time speculation is to stabilize the rate from day to day or season to season. Such speculation also has the effect of decreasing the alternate importation and exportation of gold, because the speculative sales, when exchange rates approach the gold export point, keep the rate below that gold point, and speculative purchases, when exchange rates approach the gold import point, keep the rate above that gold point.
Foreign exchange bankers should be conservative in their speculative operations. In general, banks are forbidden to deal on the commodity and stock exchanges because of the instability and danger their operations would inject into the commercial and financial world. It is possible, however, for bankers to speculate in foreign exchange, and, being free from inhibition or regulation by law, they need to exercise a self-imposed conservatism. Cer tain of these speculative operations are thoroughly legitimate and desirable.
To buy exchange as a short-time investment and to buy it as a speculation for sale at a higher price later are alike in execution and indistinguishable except as to the motive of the buyer, and even his motive is subject to change. Investments of funds in 6o-day or 9o-day bills are practically demand loans, for they may be converted into demand bills at very short notice; they are accordingly a very excellent secondary reserve for a bank, for not only are the funds readily available but the bank is earning interest upon them.
Method of Investment in Time Bills The common method of investment in time bills is as follows: If the interest rate is low in New York but the bank rate and therefore the commercial rate of interest, for substantial reasons, is high, say, in Paris; and if also, on account of large exportations of merchandise by America to France, the supply of documentary acceptance bills in New York on Paris is large and their price low, the investor will buy such 6o-day or 9o-day bills. These bills are in duplicate; the first are not indorsed by the buyer, but are stamped "For acceptance only," and sent to the Paris corre spondent with orders to have them accepted and to hold the " accepted first subject to the call of the indorsed appertaining second." The duplicate documents are then removed from the seconds and sent by next mail to the correspondent to deliver to the drawees of the respective drafts if they have duly accepted the firsts. The seconds are retained by the buyer and stamped
"accepted first held by The discounted value paid for the bills, together with com missions paid to the Paris correspondent, and the taxes and the office and postal charges, constitute the cost or investment. To speak with greater strictness, the investment is really the amount that might be realized on this same date of purchase by the sale of demand bills on Paris, of a face amount equivalent to the dis counted value (calculated by the quoted " to arrive " discount rate) of the bills on their date of arrival and acceptance in Paris. less the commission and tax charges. This amount represents what the New York investor really puts into the time invest ment; it may be more than the sum paid outright for the bills, but instead of realizing cash at once and taking this profit he leaves the larger amount in the time investment. His profits above this cost depend upon the amount realized from the bills at or before their maturity.
If the bills are retained till maturity their face value will be credited to his account abroad; about fifteen days before maturity the investor will indorse the seconds and remit them to his Paris correspondent, who holds the firsts subject to call of the indorsed seconds, and at maturity collects and credits the face amount. The seconds may be sent to some party other than the Paris correspondent, for the firsts are subject to call of the seconds, and the Paris correspondent will then have to hand the firsts over to the indorsee.
Profit from Investment in Time Bills The profit from the investment left thus to run to maturity can be determined as follows: About eight days (as many days as it takes to send the bills to Paris from New York) before ma turity, the investor may draw sight drafts on Paris for the face amount of his investment less the commission and tax charges, and sell these in New York. If the demand rate that day is low, the realized value, and of course the profits also, will be low; but if the demand rate is high the profits also will be high. The profits of the investment depend upon the sight rate of exchange, which fluctuates considerably; the investment is therefore more or less speculative. The interest rate earned on the investment may be determined by calculating the rate of the profits on the outlay, the period being from the date of investment until the date of realization by sale of the demand bills. The rate of interest yielded by the investment varies also with the demand rate of exchange.