195. Time Money Rates On Call Money Basis

The purpose of such an operation is to take advantage of a depressed market for long bills. Suppose that on account of one of Europe's not infrequent war-scares or for any other reason, discount in London makes a sharp advance, correspondingly depressing the rate of exchange for "sixties" and "nineties." A banker who buys the latter with the purpose of holding rather than of discounting is pretty sure to be making a good rate of interest on the money he has laid out. As the bill nears maturity it breaks away from the influence of the high discount rate, becoming eventually demand exchange. In the meantime, if discount has gone down, the rate at which the banker can resell his bill has gone up. For there is always a market - always the closest kind of a quotation on exchange of whatever usance. After the bill has run forty-five days, and has fifteen days left to run, the banker, if he wishes, can instantly dispose of it. And just here is one of the most attractive points about this business of investing in exchange - the buyer gets time money rates on a call money basis. The price he pays for the bill is governed by the time rate and that is what he gets if he holds the bill to maturity. But if at any time he wants to terminate the loan, so to speak, all he has to do is to resell the exchange.

196. Investing In Foreign Exchange

No better description of the actual process of investing money in for-eign exchange can be given than that which appears in Margraff's "International Exchange."

On the day of the purchase the firsts of bills of exchange are not endorsed by the purchasing banker to the order of the banker to whom remitted, as in the case of bills sent for credit, under discount, but on the face of the bills is written in full view the following phrase: For acceptance only, and the banker instructs his correspondents to whom forwarded, to obtain acceptance and to hold the accepted first subject to the call of the endorsed appertaining seconds; then by the following mail are forwarded the duplicate documents, which have been detached from the respective seconds of bills of exchange, to the same correspondents with instructions to deliver them to the drawees of respective drafts, provided the firsts have, in the meantime, been duly accepted.

Then the seconds of bills of exchange, without any documents, alone remain in the possession of the purchasing banker, and on the face of such seconds is written legibly, Accepted first held by--------------, inserting the name of the banker to whom the firsts were sent for procurement of acceptance.

The investment of funds has now been completed and the seconds are placed in the purchasing banker's portfolio with interest to his credit accruing thereon from day to day at the rate of purchase, which, in the case at hand, was 4 1/2 per cent per annum, that being the private discount rate in Germany on the date of the purchase of the bills. If these seconds of bills of exchange are held by the purchasing banker to within ten days of the date of maturity, and there has been no fluctuation in the price for checks on Germany in the interim, then the investment has netted 4 1/2 per cent per annum for the period of time represented by the tenor of these bills.

But, if on the other hand, the rate of exchange for checks on Germany has advanced, say, one-quarter per cent during the time the seconds were held, and the bills were ninety-day sight bills, then his investment would have netted an additional 1 per cent, or, in all, 5 1/2 per cent per annum for the ninety days.

A loss to the investor by virtue of a decline in the price of checks is rarely occasioned, owing to the fact that in almost all cases, the purchase of the long bills is made at a time when the rates of exchange are low, in consequence of the abundance of bills offered by exporters; and as the life of the bills is sixty or ninety days, it is fair to assume, that, at some time during this period, either the price for checks will have advanced, or the rate of discount in the open market will have declined, so as to permit the investor to realize upon his long bills, by conversion into checks, at an additional profit.

Investments in foreign bills of exchange are by no means confined to the purchase of documentary acceptance bills, such as just described, but are accomplished, also, by the purchase of sixty or ninety days' sight drafts drawn by the bankers in this country upon their European correspondents. These drafts are ordinarily issued in pounds sterling upon London bankers. The modus operandi is identical with that relative to documentary acceptance bills in Germany, with this difference, that there are no documents attached to bankers' bills.

In concluding this subject, observe that it is not necessary for the investor to remit the seconds of bills of exchange, previously referred to, to the banker to whom the appertaining firsts were sent, and notice that the latter were forwarded merely for acceptance and retention, subject to the call of the endorsed seconds, consequently, the seconds can be endorsed and remitted for collection and credit to any banker who will obtain possession of the firsts by the presentation of the endorsed seconds, the two parts, viz: accepted firsts and endorsed seconds constituting the completed bills.

Great care should of course be exercised in keeping an accurate memorandum of the dates of maturity abroad of all bills of exchange held in portfolio for investment, so that by refer-VI - 22 ence thereto it can be readily seen what bills have to be extracted for remittance.

All bills of exchange must be presented to the drawees (or acceptors) for payment on date of maturity and ample time should be allowed for transit; and to guard against a possible delay in receipt of the mail with endorsed seconds of exchange forwarded to a banker for collection and credit, it is advisable to allow five days in excess of the ordinary time required to reach a given destination, to enable the banker to whom seconds have been sent to procure the appertaining accepted firsts and demand payment of the drawees by presentation of the completed bills on date of maturity.