Of course, it must be understood that our illustration is purely an imaginative one, but it is admirably adapted for showing how the price of silver necessarily affects the rates of exchange, which must rise or fall proportionately to the intrinsic value, weight for weight, or price for price, of the coins to be exchanged between one country and another. HOW TO CALCULATE EXCHANGES. Owing to the continuous fluctuations of the exchanges, it becomes a matter of calculation with a merchant in London wishing to place money in any foreign city, whether it will pay him best to buy bills here to remit abroad, to ship bullion or specie there, or to direct his correspondent abroad to draw on him. Similarly, when he wishes to get money over from abroad, he will calculate whether he will draw, or ask his correspondent to remit, or to send specie, and in making these calculations there are other elements to be taken into consideration beyond the actual rates of exchange-such as the differences of the rates of interest on money and the brokerage, freight, packing and insurance on specie. Taking an imaginary case, let us suppose that in London the sight exchange on Paris is 25.25 fr., and that in Paris the sight exchange on London is 25.30 fr. It will be clear that for a London merchant to place money in Paris, it will be better for Paris to draw bills on London than for London to remit bills on Paris, for while the Paris house gets 25.30 fr. for every £1 it draws, the London merchant would have to give £1 for every 25.25 fr. on Paris. Similarly, if it is required to bring money over from Paris to London, it will pay better for the London merchant to draw bills on Paris, for he will get £1 for every 25-25 fr. he draws, whereas if Paris were to remit bills on London, the Paris house would have to pay 25.30 fr. for every £1 sterling. When it is desired to calculate between operations at any term not at sight, we must bring both values to the short or cash value. For instance, suppose that in London the three months' exchange on Paris is 25.50 fr., and that in Paris the three months' exchange on London is 25.05 fr., and we wish to place £1,000 in Paris. Will it pay us best to remit, or to tell our Paris correspondent to draw on us, the rate of interest in both places being 4 per cent.? Example. In London £1,000 remitted at 25.50 will produce in Paris fr.25,500 00 To turn it into its cash value, deduct three months' interest, or rather discount at 4 per cent. per annum Net proceeds of £1,000 remitted to Paris 255 00 fr.25,245 00 fr.25,050 00 In Paris a £1,000 bill drawn on London and sold in Paris annum Net proceeds of £1,000 drawn in Paris By deducting the proceeds of the £1,000 remitted to Paris, it will be seen that it will pay us better by for our Paris correspondent to draw on us. In calculating the best way of placing money in Paris, or any other continental city, a merchant will also consider whether it will be to his advantage to effect the operation through the medium of some other country, as, for instance, by buying a bill on Hamburg or any other place, and directing his correspondent there to invest the proceeds in the purchase of a bill on Paris, as explained in Arbitrations of Exchange. Every exchange calculation in reality resolves itself into a rule of three sum, and a moment's consideration will show the reader how to work out direct exchanges,, but we illustrate one or two examples below. STERLING INTO FRANCS. To exchange £560 into Francs at exchange 25.50 per £1. FRANCS INTO STERLING. To exchange fr.12,500 into Sterling at exchange 25.05 per £1. STERLING INTO MILREIS. To exchange £560 into Milreis at exchange 524d. per Milreis. REIS INTO STERLING. To exchange reis 475,000 into Sterling at exchange 53d. per milreis. reis 1,000: 53d.:: reis. 475,000. Arbitrations of exchange are calculations to determine the rates of exchange produced by Indirect Bills of Exchange, Bullion, Coins, or Merchandise, purchased in one country and sold in another. They are Simple or Compound, according as they are based on one or several Cross Exchanges. These arbitrated rates are often called Pars of Exchange. The object of finding Arbitrated Rates of Exchange being explained, it is necessary here to mention that although coins, bullion and merchandise will be brought into the general definition, they are generally excluded from consideration when use is made of the term Arbitrations of Exchange. GENERAL RULE. Make an equation or statement of the given rates in the form of a continued proportion in the following order : Place the fixed term of the rate of the place making the operation as the term of demand (indicated by ?): then when the fixed term of the required par is in the money of the place where the bills, etc., are bought, the buying price at that place is to be the first rate of the equation, and the selling price at the other place is to be the second rate of the equation; but when the fixed term of the required par is in the money of the place where the bills, etc., are to be sold, make the selling price the first rate and the buying price the second rate of the equation. In both cases, such extra rates are to be introduced or added as are necessary either to connect the terms of the rates, or to reduce the results to such quantities as the answer may require; and the whole is then to be worked by the Chain Rule or "Rule of Equations". Thus, as £1 or 240d. is the fixed term of the rate between London and Paris, Amsterdam, Hamburg, Vienna, etc., in arbitrations between London and these places, this sum of money must be made the term of demand; then the Sterling money in the buying rate must be made the first term of the 1st equation, and its value the second term: that term of the selling rate which is like the last term must then be made the first term of the 2nd equation, and its value in the money of the other place concerned must be made the last term; but as the fixed term of the rate between London and Lisbon, Naples, Madrid, etc., is in the money of those places, the fixed price is made the term of demand; the first rate of the equation is then the selling price, and the second rate (unless any intermediate connecting term is required) is the buying price. (a) ARBITRATIONS OF BILLS OF EXCHANGE. Example. To find what par of exchange is established between London and Paris, by bills on Madrid bought in London at 49§d. per dollar, and sold in Paris at 5 frs. 17 cents per dollar. Statement 5.17 x 240 1240.80 495 = = 240d. = £1 ?. 49 = 1 Dollar 1 = 5.17 Frs. 1240-80. Frs. 25, 06 Cts. Hence bills on Madrid bought in London at 494d. per dollar and sold in Paris at 5:17 frs. will produce frs. 25,06 cents for £1 sterling. |