Form of Exchange Contract The contracts are very simple and are classified as follows: The forms (d), (e), and (f) are exactly like (a), (b), and (c) above, except that the words "Sold to " take the place of "Bought from." The contracts are filled out and sig-ned by the trader handling the transaction and handed to the head of the cable desk in the foreign tellers' department.
Competition in foreign exchange business is very keen and is increasing as a greater number of banks open foreign depart ments, each new department bidding for business from concerns which have for some time bought and sold their exchange at some one bank. Price-cutting has developed, and close-buying mer cantile houses are able to get their exchange at rock-bottom rates, as well as to speculate on future rates. The margins of profits to the foreign exchange banks per dollar of exchange handled have narrowed under the pressure of this competition.
Competition has also extended to the brokers. Their com mission was formerly 1/16 per cent, but it gradually dropped until, before the war, it stood at about 1/128 per cent. While there is no fixed rate, at present brokers charge from 1/16 to 1/8 of a cent per pound sterling and point on the continental ex changes, with the exception of marks for which they charge 1/4 to 1/ 2 a point. The tendency to decrease commissions continues.
Some years ago certain brokers began to speculate on their own account, buying from one bank in the morning and closing out in the afternoon and taking their profit or loss as the case might be. The practice spread until now there are very few brokers who do not speculate both between banks and among themselves. The probable effect of this competition among brokers and banks is to create a more sensitive market, more stable rates, narrower gradations, and approximately one rate in the whole New York market instead of several rates at the same time.
One very interesting and astute form of trading is known as "arbitrage," the buying and selling of exchange in one market to sell or buy it in another and profiting by the differences of rates in the markets.
Another interesting phase of the traders' work is the move ment of gold from one country to another and the underlying prindples which govern these movements.
English Money and Exchange Calculations The limits of this bbok do not permit the calculations of all kinds of exchange problems and only a few of the more common ones are given. These, however, are typical. Since the method of
quoting franc and mark exchange has been but recently changed, the problems will be stated with both quotations and solved accordingly.
Calculation of Price of Documentary Long Bills The above calculations do not show how the banker deter mines upon the rate he will pay for a bill; they assume a rate and effect a conversion at that rate. The factors considered in the calculation of the rate to bid for a bill embrace the drawee coun try, the drawee bank or merchant house, the usance, the discount rate, whether a documentary acceptance or payment bill is offered, whether it covers perishable or non-perishable goods, the commission to the foreign banker, the foreign stamp duty, if any, and the American stamp duty, the profit the banker wishes to make, and the check rate at which he can sell his demand draft. The variations of these factors are, of course, innumerable, and only two variations will be illustrated. In such calculations it was customary before the war to assume as a basis of calculation SI = and to calculate interest at 365 days to the year and allow 3 days of grace on time bills. Greater accuracy may be achieved by using the existing sight rate rather than 4.85; in fact, this sight rate is now in general use and will probably continue in use until the exchanges again approach the mint pars.
1. Price that can be bid for a 6o-day sight documentary acceptance bill on a prime London bank, if the buyer knows he can sell his demand draft on London at $4.873 on the day he purchases the 6o-day bill.
Assuming that no commissions are charged and that the London " to arrive " discount rate is 4% and that the bill can be sold on date of accep tance: Discount deducted when bill is sold in London on day of accep tance . for 63 days at 4% on $4.83 .033664 English stamp duty, 1/2o% of 4.83 .0°2423 Margin of profit wanted by the American bank, 1/4o% .001213 Total charges to be deducted from demand rate .037304 $4.875 — to373 = $4.83 77, which is the highest price the American can pay for the 6o-day bill and make the profit he wishes. The bidder will probably bid 4.83 75, which is the nearest standard rate. The difference between the sight rate and the buying rate is called the "spread." Any variation in discount, tax, or profit rates affects the spread.