These parities serve merely to guide the traders when buying and selling exchange. As the market changes constantly it is necessary to figure the parities daily, and should there be any changes in the price of sterling exchange, either up or down, the relative differences on continental exchanges would be added or deducted, as the case might be. For instance, the parity of mark demand exchange being 95.29 at 20.47 and 4.8765, should sterling rise in New York to 4.88, mark parity would rise to 95.36; on the other hand, should exchange in Hamburg fall to 20.46, parity for marks in New York would be 95.34. These changes would be figured mentally by the traders as they occurred.
Conunercial parities are likewise calculated for long bills, and the interest factor must also be taken into account.
In making parity calculations the traders do not use tables. As changes take place in the market the traders sometimes alter the figures on the day's parity sheet and sometimes, just glancing at those already made, figure the changes mentally, using various short cuts in their calculations.
The bank receives daily, by cable, rates from the various countries with which it does an extensive business. These rates are usually firm offers or firm bids and are available, up to a certain amount, for acceptance by wire for buying and selling. The limits as to the amounts in each case differ, depending upon the size of the banking house that makes the quotations. The quotations received include the cable and check rate, on the vari ous leading exchange points, and the discount rates. When the traders reach their desks in the morning the cable quotations from foreign cities are at hand and show just what changes have occurred in the markets overnight.
Using these cable quotations, the traders prepare their parity sheets, which are charts of the exchanges and the key to the foreign exchange situation. Figure 39 is a portion of such a parity sheet for a certain pre-war date.
Method of Using Parity Sheets The first column is for the bank rate, that is, of the Bank of England, the Reichsbank, the Bank of France, etc. This figure enables the traders to keep track of the variations between the bank rate and the open market rate and to know how to calculate documentary payment bills. The changes in the London, Paris, and Berlin discount rates affect the exchange quotations. For example, if the discount rates and exchange rates close in a state of equality in London, Berlin, and Paris, and on the following morning the discount rate rises in London, exchange rates in Berlin and Paris will rise because of the demand in those cities for exchange on London. The cables to New York will indicate
these increases and the exchange rate in New York will rise for the same reason. The rise in the London discount rate causes changes throughout the entire parity sheet, for cables, demand, and long bills.
When the market opens in the morning, the traders place in the cable column the selling and buying price for cables, and in the deinand column the selling and buying price for checks. In buy ing an acceptance bill at 3o days' sight, the traders refer to a table prepared for the purpose and find that at the prevailing discount rate (stamp included) a deduction of r.or should be made from the demand rate, leaving in this case 485.19 (or 486.2o — r.or) as the price to be paid for the 3o days' sight bill. This bill when delivered is sent to London for sale and credit and by the same mail is sent a draft drawn against it so that no interest will be lost while the bill is floating. The same process applies to the 6o and 90 days' acceptance bills sold to arrive at the price for these bankers' bills.
The 6o days' sight sterling payment bills are not discountable, as it is not known when they will be paid. They are commonly taken up before maturity, and interest is rebated in England at per cent less than the bank rate and on the continent at the bank rate; but whether they are so taken up varies with the con signee, the conditions of the market, the nature of the goods covered, and the market rate for money.
The calculation of marks, francs, and the other exchanges is identical in principle.
The quotations published in the metropolitan dailies are not official in any way, as are the stock exchange quotations, but are gathered from the various banks and bankers, and if there is a brisk market and trading continues after the paper goes to press the quotations may change considerably from those published.
The rates appearing in the papers are, of course, derived from the parity sheets.
The Conference on the Exchanges After the parity sheets have been prepared and before much trading occurs, it is the custom of banks to hold a conference upon the foreign exchange situation and to determine the day's policy as to buying and selling. This meeting is attended by the traders, the bank officers in charge of the foreign exchange work of the bank, and others whose counsel may be desirable. The preparations for this conference consist in making up the parity sheets, sounding the brokers for the drift of the market, and ex amining the position sheets, which describe the condition of the bank's balances, present and prospective, in the leading foreign exchange markets abroad.