212. International Speculations

Turning to the second class of international trading - speculative operations by foreign interests in our market - it appears that dealings of this kind at times foot up to an enormous total. There are, of course, countless forms in which operations of this kind are conducted, but they are pretty much all based upon the principle which the following example illustrates. An operator or banking house abroad has come to a cable agreement with its American representative that a certain stock can be profitably bought. The amount which is to be carried (joint account, usually) is fixed upon and the American firm goes ahead and buys the stock. But instead of paying for the stock out of its own capital or borrowing the money from a bank, the American house is apt to raise the money by drawing sixty to ninety-day bills of exchange in pounds, marks, or francs, as the case may be, upon its foreign partner in the transaction. These "long" bills it sells in the exchange market, using the dollar proceeds to pay for the stocks which have been bought.

As the case then stands, the stocks have been bought and are being carried with money on which no interest is being paid. At the same time it must always be remembered that the American house has drawn and the foreign house has "accepted" ninety-day bills of exchange, and that in just three months the holders of the bills will come to the firm on which they are drawn and demand payment. By that time the American firm must have sent money across with which to meet the maturing bills.

But suppose that the parties in the transaction have not had the chance or have not seen fit to sell their stock before the bills of exchange come due in Europe. Where, then, is the American firm going to raise the money to send abroad to its correspondents? By "renewing" as they call it - selling more long bills and using the proceeds to send across to retire the first set of long bills. Suppose that in the first place £10,-000 of ninety-day bills had been drawn and fell due November 30. Then, if the stock had not been sold, on November 30 the American house would draw£l0,-000 more of ninety-day bills and use the dollar proceeds to buy demand exchange to send to its foreign correspondent. The dollar proceeds of £10,000, "nineties, ' would, of course, not be enough to buy £10,000 of demand exchange the same day. The demand exchange would be apt to cost from three to four cents a pound sterling more than could be realized on the new set of "nineties," this difference representing the interest on the money.

As has been remarked, international speculative operations in stocks are of an infinite variety and involve all kinds of complicated foreign exchange transactions. Very often the stocks or bonds are not bought on joint account and instead of being "carried" here, are drawn against, and at once shipped to the other side. Sometimes, even in joint account transactions, it is found better to ship the stocks to a foreign market and borrow on them there. Operations of this sort, however, are more apt to come under the first class mentioned. Where stock is bought for a turn the whole transaction is likely to be along the line of the example which has been given.