 |
| Foreign exchange formula diagram. |
Foreign Exchange-
The expression may be defined as the sum
of those operations having
for their object the transmission of money
from one country to another or to
express the same meaning
in other words as machinery or organization by which the currency of one country is exchanged for its market
equivalent in the currency of
another country. When people buy
foreign exchange or
speculate in foreign exchange, what is meant in the first case is that British currency
is exchanged for a foreign currency
and in the second case, that
certain people are taking a view of this
or that foreign currency
and are exchanging British currency
for a foreign currency in
the hope
that they may gain
subsequently by the rise or fall, as
the case may be , in the
value of the foreign currency relative to that of British
currency. It is necessary to understand
at the outset exactly
what it is that is exchanged. It is not actual money. A comparatively insignificant
business is done by money –changers and
banks in buying and selling actual money. Harry & Sons, Ltd , in
London are able at any time subject to
exchange control to exchange actual notes
of the bank of England for their equivalent , less expenses and
profit , into notes of the
Bank of France or into other foreign
currencies and large Joint –stock
Banks can also oblige
their customers in this way. This
sort of business is however , insignificant and can be ignored. What is meant by foreign exchange in the sense
now to be considered is the
exchange of rights of money , say now to be considered , is the exchange of
rights of money , say the right
to sterling money existing
in the form of a credit balance
in the books of a London bank or in the form of credit balance
in the books of a London bank, or
in a cheque or a bill of exchange on London
or in any other form of sterling
monetary claim on London ,
or for the right say to dollars in New York existing in the form of a credit
entry in a New York bank
or in Cheque or a bill of exchange payable by some
bank or citizen of the united states or in any other form of
claim on dollar currency.
The importance of
Foreign Exchange-Since Pounds sterling stay in Britain , Francs in France, Dollars in the United states of
America, Yen in Japan, Naira in Nigeria, Rand in South Africa e.t.c it is
clear that if , for example , an
Englishman in London owes a sum
of francs to a Frenchman in
Paris, he must in order to discharge
the debt , find some one in
London who in exchange
for the English debtor’s right
to so much sterling
in London will give his French
creditor the right
to the equivalent francs in Paris. In short , the London debtor
exchanges his cheque drawn
on a London bank for a sum in pounds for the bank’s cheque
drawn on its Paris correspondent for an equivalent sum in
francs. Before 1939, the London foreign
exchange Market was the
organization by which the
rates of exchange between
sterling and the various other national currencies
were fixed. It still is the organization through which
the actual work of transferring sterling
into those currencies is
affected.
Exchange Control-It
has been necessary on numerous occasions to point out that restrictions imposed
as a result of the second world war have modified what were regarded as normal
practices prior to 1939. Equally, in most cases some
explanation of pre-war practices has been given , because first
it assists an understanding of present conditions and secondly
the controls can in many cases
be regarded as transitory. In
this instance the exchange control Act, 1948 is the cause of the
modifications. The main effects of this Act are
(a)
To make it illegal to make payments
to countries outside the sterling
area without Treasury consent.
(b)
To make
it obligatory for people who receive
foreign currency in return
for goods or services to offer
that currency for sale to certain
authorized foreign exchange
dealers.
(c)
To make
it mandatory for people
exporting goods or
services to certain countries
to insist upon payment in a
certain way e.g exports
to the U.S.A must be paid in dollars.
The first
of these provisions does not mean
that every individual or
firm has to obtain written
consent from the Treasury
on each occasion that it
wishes to purchase some foreign
currency in order to make
a payment outside the sterling area. The possession for example
of an import license is regarded by banks
and foreign exchange dealers as sufficient authority for the sale
of currency . Exchange can similarly be obtained where goods
can be imported under open general license, that is where no
special import license is necessary. Tourists wishing to travel
overseas can obtain their
ration of currency by presenting their passport for endorsement. A further point is that , where as before
the 1939-45 world war, exchange rates
were free to move and there was
a large and active foreign exchange
Market , now all currency
purchases and sales have to made at official rates fixed by the bank of England . Equally such
transactions may only of affected
through authorized dealers. Spain is the only European country with which trade is conducted other
than at official rates. Attention!
there is the difference between
intervention and restriction .
Hence while the exchange
equalization Account was used for intervention in the foreign exchange market
in the 1930’s this did not
prevent it being a free market. The restrictions now
imposed , however , prevent it
entirely from being a free market and thus while the market still exists and is the agency through which transfers of currency are
made , it is no longer the place
where rates between sterling
and other national currencies
are fixed. There are , of course
, free markets in other parts of the world , but the operations of the international monetary fund have had a stabilizing
effect upon the exchange
rates of many countries.
How
International Debts Arise- The nationals of one country become
indebted to the nationals of another
in a variety of ways. This may be enumerated under four types (a)Trade
(b)Banking (c)Investment (d) Speculation. Under trade is to be
included not only the
international indebtedness that
arises from the importation and exportation of merchandise but also
that from the services ancillary
to trade viz shipping , banking and insurance
services , all of which must be
paid for the persons
benefitting . Under Banking must be included the former large transfers of funds made for the purpose of taking advantage of a higher
interest rate in one financial centre than in another or transfers made at the instance of
wealthy people who fearing that their own national currency will be devaluated , exchange it for a currency more
secure.There are , of course , rigorous
restrictions on the transfer
of sterling and capital as opposed to current –transactions of this nature are rarely
if ever made at the present time. By investment is meant the purchase
or sale of the bonds
issued by governments of the
world and of those industrial securities
which being quoted
on the stock exchanges and bourses of the world’s financial capitals , command an international market; and the capital and interest
payments resulting from such transactions of this type
is also severely limited at present. Speculation will include
arbitrage dealings and all
those operations entered
upon not for the purpose of discharging immediately accrued indebtedness , but in the hope
that , now by the rise , now by a fall
in the external value of a
currency, the operators will be able to secure large profits
for themselves. It should be
noted that normal arbitrage transactions are not
mere gambling operations. They
have the useful effect
of smoothing out the differences
in the quoted price of a particular currency
that they may exist at the same moment in two or more financial
centres . But some arbitrage business is a vicious form of gambling and governments attempted
to suppress it by
legislation even prior
to 1938-39. The ill-effects of
such gambling activities
are now generally recognized
and so far as the U.K is
concerned current restrictions
prevent such activities effectively. All these
transactions give rise to
international claims or rights
to currencies , evidenced by cheques , bills of exchange , mail transfers,
telegraphic transfers, via nowadays
Internet, share certificates , share warrants , registered or bearer
bonds , interest coupons or by entries in the books of the banks
of the world.
Purchasing
Power Parity- Money apart from its
metallic value , when it is of metal
is of value only by reason
of the command that it gives over goods
and services and so in a free market , the external value
of two currencies that is
the rate exchange , tends to the point
of equilibrium known as the
purchasing power parity may be defined
as the relation between the
purchasing powers of the two
currencies each in its own country.
Day
To Day Movements in Rates-The exchange or the buying and selling of currencies
is governed by the same laws
as the buying and selling of cocoa or wheat or any other commodity.If
sellers are preponderant , it
will decline. Under these free conditions in the foreign exchange
market. If , for example for
long periods the
demand for dollars in the London
foreign exchange market by
those who had to discharge
debts to private citizens, firms corporations and banking
institutions in the united states was
roughly commensurate with the
demand in New York for sterling
by those who had to discharge
debts to private citizens , firms, corporations and banking
institutions in Great Britain and Northern Ireland and this rough equilibrium
was undisturbed by repayment
of any inter-governmental
loans or by other
disturbing factors e.g
speculation then of course
there would have been little
movement in the London –New York rate
of exchange. The rate would have tended to the purchasing -power
parity between sterling
and dollars and remained
about the parity for long periods. But each was
not the case. Exporting and
Importing between this country
and the United States did not and
do not proceed pari passu.The imports
in the autumn of the year from the United states by British
Buyers , when the U.S ,
wheat and grain crops were
being moved , were normally very
much greater than
the combined exports
of British Firms to the United States during
that period of the year. There
might at one period
have been enormous banking
transactions between London and New York , quite unconnected with trade power and comparatively trifling
transactions of that sort at other
periods a con- temporary example
of this type of payment
is the interest on a payment of ,
the American Loan which now
falls due once in a year. A mood
of pessimism as to future movements
of sterling in the united states
of America might have hastened to get
rid of their sterling holdings and Frenchmen , too , might have
sold sterling in order
to posses themselves of dollars. Again
mere speculators might take a hand , as they did in 1930 -32 when the gold standard was
forced of from certain countries
including Great Britain and before the
exchange equalization fund was built
up in order to
defeat their operations . For
these and other reasons , the
day to day rates of exchange between London and Paris , London and Amsterdam and other
important financial centers constantly varied.
The
limits of Day To Day Movements-It has
been seen that , in the long run , the
rate of exchange between
two national currencies is the
relation between their respective
purchasing powers , each in its
own country. That has always
been true in free conditions. But in
considering the day to day variations
in exchange rates it is necessary to treat the matter historically (a)When the currencies of the chief mercantile nations were based
upon gold (b) when the currencies were with
few exceptions unrelated to gold
and inconvertible . Roughly , the division is between (1)pre-1914
Currency economy (2)Post 1918 currency chaos.
Pre-1914
C-Economy-Under any form of gold
standard – gold specie standard or
gold bullion standard
or gold exchange standard – the
purchasing power of a currency
is the purchasing power of it’s gold
equivalent , prices are gold prices
and gold and goods tend
to have the same value. Moreover
, the relative values of two gold standard currencies , no matter whether
the standard coins are
actually in circulation or not , is readily determined
by comparing the fine gold content
of the standard coins of the two countries as laid down
by their currency laws. This
relation is known as the Mint
Par of Exchange. It is the physical
measurement of two units of varying
quantity in terms of each other –much the same , in fact , as when pounds avoirdupois are equated with kilogrammes. In pre-1914 era, the pure gold content
of a British sovereign was equal
to the pure gold content of Fcs.
25.2215, or 20.429 Reichsmarks, or 4.862/3rds U.S dollars. A
mint par of exchange was
calculable for the standard coin
of every currency linked
with gold. Thus by British currency
law the sovereign contained
7.98805 grammes , equivalent to 123.27447 grains, of gold 11/12ths
fine and by French currency law
155 twenty franc gold
pieces were coined from 1 kilogramme of gold 9/10ths
fine. By chain rule , the pre-war
mint parity between sovereigns
and gold francs was ascertained as follows
?Francs= £1
£1=7.98805grammes
gold 1/1 ½ this fine.
£12 Br.s
Standard=£11fine gold
900 Grammes
fine =3,100 francs
7.98805×11×3100=25.2215
12× 900
Mint par £1=25.2215 Fcs.
A similar
calculation based upon
the information given in each country’s
mint regulations gave the mint
par of exchange for every
other currency based upon gold.
Gold
/Specie Points-When it is said that
under pre-1914 conditions the gold sovereign
was equal to Fcs. 25.2215 in gold
, it was true only
on the supposition that no cost
was involved in sending a gold
sovereign to Paris or 25.2215 gold francs to London. Obviously the cost
of carriage insurance and interest
had to be taken into account.
This cost , although it could not
be determined with
meticulous accuracy , since the cost
varied with the size of the gold
shipment was roughly in the neighbourhood of 1o centimes per £;so
that a Londoner sending £100 to Paris would
have realized net in Paris ,
allowing for the cost of remitting , Fcs 2522.15 less 10
centimes per £=Fcs.2512 and person sending
gold francs from Paris to London
would have paid Fcs.2522.15 plus 10
centimes per Fcs. 2512.15=Fcs.2532.15
for each £100.
Thus , if the rate of exchange Paris on
London that is the price of bill of exchange on London rose above Fcs. 25.3215 for each £1 and the French remitter had no cheaper method
of remittance , he could have
sent gold and realized at aleast , a rate of Fcs.251215, the London remitter could have sent gold and realized
that rate. Hence at that time
when gold was freely
obtainable and feely shipped
from one financial centre to another , the mint pars
of exchange between any two currencies
on the gold standard , plus or
minus the cost of shipping gold
between the two centres , marked the
limits of rise and fall in the rates
of exchange between those
centres. These two points are known as
gold or specie points. Of course when
the export of gold is forbidden
in so many countries and
gold has become an article of merchandise, gold or specie
points have little practical
significance.
Effect
Of Unrestricted Gold Movements-It goes
without saying that international
indebtedness will always be discharged
in the cheapest mode open to
the debtor. Before 1914, when owing
to a rise in the cost of bills of
exchange . it became cheaper to
discharge international debts in
gold than in any other way , then , if the gold were procurable , debts were paid in gold. A rise in the rate
of exchange say of the New York – London
exchange from its pre-1914 parity
of £1=$4.862/3
to about $4.89, the New York export gold
point made it cheapest for New York to discharge debts due to London in gold. This probably
meant that general commodity
price level in the United states of America had for a period
of time being higher than the general
commodity price level in the
United Kingdom were encouraged
and exports from the United states to United Kingdom were discouraged and so the
balance of indebtedness between
the two countries continued to be
against the United states. The export of gold
from New York to London not only
discharged the immediately
accrued currency and credit in
the united states and by increasing the
volume of currency and credit in the united kingdom caused time , a fall in
general price level in the united
kingdom. This restored the price levels
of the two countries to a rough equilibrium , with the result
that receipts and payments between them
in respect of imports and exports tended to
equality and the exchange
rate settled down
again around the mint
par exchange. It is easy to apply these
remarks to reverse case
of a fall in the London –New
York rate from mint par rate
$4.862/3 to round about $4.82=£1, the old export gold export
point from London to New York.It should be observed ,
that this brief exposition has been purposely over-simplified for the sake
of clarity. The reasons of
exchange movements were often
complex. International trade , albeit
a most important factor
, is but one of the factors that entered
into the matter . Further , nothing
has been said of the effect of a higher
or lower bank rate in one centre than another and it has been assumed contrary to the facts , that the rest
of the world –trade had no influence
on the London –New York exchange. But
enough has being said
to bring out the point
that , in the pre-1914 era when gold
was easily procurable at fixed
rates and readily shipped from one centre to another , then whenever , the rate of exchange
made it profitable to do so , a
transfer of gold between two financial
centres tended automatically
to adjust the disparity in the exchange rate and in time
to bring it back to par of exchange of the currencies .
Post
-1918- The general monetary collapse
that followed the first world war (WW1)
deprived the mint pars of exchange and gold points of all practical significance
and left the world with no exact
means of measuring the depreciation in purchasing
power of one currency as compared with another . It was known
that parity between any two
currencies –other things being equal –
was determined by the purchasing
power of each own country but the means
of measuring that matter very greatly
as other things were rarely if ever
equal and many other factors did in
fact affect rates very
considerably. This means now generally
used to measure the purchasing power of any particular
currency is that of compiling
an Index number. The statistical problems of relating the purchasing power index of one country with that of
another are however very great.
Index
Numbers-Index numbers can be
compiled in many different ways but with interim
index of retail prices
which is the official price index
current in the U.k- the method of
compilation is explained in the
following - The primary object
of the index is to measure the cost
living for working class households. This another way of
saying that its object
is to measure how much
the different items normally
purchased by these households cost. It
is therefore also a
measure of the purchasing power
of their money.
The first step is to determine what
commodities these households purchase
on an average and in what
quantities. If the index
is to be a good one the list of commodities should
be as comprehensive as possible.
The next step is to fix
what is called the base of the
index i.e a standard date
for comparison purposes. The last problem
is to devise the machinery where by
the prices of the commodities in the list are obtained
at regular intervals and the index complied swiftly. This perhaps not
quite such a simple matter as it may seem. With items such
as home grown fruit and vegetables the prices
are apt to be different
in different parts of countries.
On any given day the price of a cauliflower of a given size will probably
be higher in a large town
than a small village . Equally it is often difficult
to make sure that prices are being
obtained for articles of the same quality. If the prices of 1lB. of
eating apples is 1s
on one day and 6D on another day, this price difference
cannot be regarded entirely as a fall in price unless the pound of
apples is of exactly the same quality on the two
occasions. There are in practice complications in the computation of the index . For instance , different methods
of combining and averaging the
prices of different commodities
in the index may be employed –it
is possible to use either arithmetic or geometric means. But a
simple illustration is perhaps the best
method of explaining the method compilation. First , the list of commodities to be included is drawn up , for the purposes of this brief illustration the list
will be severely restricted and will not
include all essential items
on which working class households
spend their money, The list to be used are, Milk , Bread, Rent, A winter
coat. On assumption obviously quite
false that these are the only items on which
people spend their money it is possible after every survey made been made to compute approximately what percent of their income they spend on each item over , lets say a year. This might produce
the following outcome results-
Milk-20%
Bread-50%
Winter
Coat-20%
Rent-10%
This information is necessary so that the quantities of each item to be included may be determined. Another way
of putting this is to say that it is necessary in order
to determine the importance or weighting
to be attached to each item. If 1st June , year 1 is the base or starting point of the
index , the indices might be
computed as follows.
Price Year 1.
|
Index Base year.
|
Price year 2
|
Index
|
weight
|
Index × Weight
|
||
Large white loaf of Bread.
Rent of council house
1 gallon of Milk flannel coat
|
6d
Ios
4s.
£5
|
100
100
100
100
|
8d
12s
6s
£5
|
8/6×100=133
1/1 2/o×100=120
6/4×100=150
5/5×100=100
|
20
50
20
10
|
2,600
6,000
3,000
1,000
|
|
100
|
12,660
|
||||||
The combined Index
for year 2 is obtained by dividing
the total of the end column by
the sum of the weights that is 100.Hence
Index for year 2 =12,660 =126.6
100
In year 3 results might be as follows-
Price year 1
|
Index Year 1
|
Price year 3
|
Index year 3
|
weight
|
Index × weight
|
||
Large white Loaf bread
Rent of council House
1 gallon of milk
Flannel suit
|
6d
Ios
4s
£5
|
100
100
100
100
|
7d
15s
5s
£4
|
7/6 ×100
1/1 5/0 ×100
5/4 ×100
4/5 ×100=80
|
20
50
20
10
|
2,340
7,500
2,500
800
|
|
100
|
13,140
|
Hence Index for year
3 =13,140=131.4
100
Thus the index is - Year 1-------------------100,
2-----------------126.6, 3-------------131.4
The effect of weighing is to control the influence of changes in the price
of individual items upon
the combined index. If , for
example , the price of a flannel winter
coat had been £10, representing an
increase of 100% instead
of a decrease of 20% over the base
date the final index
would have been
only 12 points higher
at 143.4. Had the rent of a council
house been up
by 100% instead of 50% the final index
would have been 156.4. The cost of living
index current in Great Britain until 1947 was weighted according
to the pattern of working
class expenditure in 1904 and the base year was in 1914. It had been recognized a long time
before 1947 that the basis for the index
was out of date and just before the second world war (ww2) a
further investigation into working
class budgets was made. The results of this enquiry were used in compiling the 1947 basis for the
index. It was more comprehensive
than the earlier one,
and included numerous items
that were not considered to constitute
part of the working class standard of life in 1904 but
which are undoubtedly so today for example radio sets, bicycles, Jam. While a final
basis for present –day conditions
has not yet been
agreed the interim 1947 index
was slightly modified as
from February . 1952. The pattern
of working class expenditure for index
as a result. In addition, the base
17th June , 1947=100
was changed to 15th January , 1952 =100.The weights now actually used are as follows
Food----------------------------------------------------------------------399
Rent &
Rates----------------------------------------------------------72
Clothing---------------------------------------------------------------98
Fuel&light----------------------------------------------------------66
Household Durable
Goods--------------------------------------62
Miscellaneous
Goods---------------------------------------------44
Services-------------------------------------------------------------91
Alcoholic Drink----------------------------------------------------78
Tobacco/Budd-----------------------------------------------------90
1,000
The linking of different
indices right back to 1914 is
a doubtful procedure, but it is done in the London
and Cambridge economic service
bulletin now published in the
Times review of industry, According to these computations if the 1938 value is taken
as 100, 1914 was 64 and 1953 about 225. It should be observed that it is possible to compile
index numbers for numerous
other economic series
besides retail prices –wholesale prices , industrial production, base metal
prices, share prices e.t.c The main purpose here is
to show how a retail price index
can also be a rough
indicator of purchasing power
of a currency the higher the index the lower the purchasing power . Equally indices
complied in two different countries
for two different currencies may
be roughly related to afford some
indication of their relative purchasing powers . For example
the price indices of two countries may move
as follows-
Country A
|
Country B
|
|
Year 1
Year 2
Year 3
Year4
|
100
120
125
130
|
100
105
115
112
|
It is very possible
that from looking at these figures
that while the purchasing power
of both currencies has fallen that
of country A has probably
fallen relatively more 30% against 12%. The main
difficulty in making any such
comparison is that
the goods included in the two
indices will probably not be the same and they are therefore
not strictly comparable. One index
may represent a higher
standard of life than the
other although that standard
may be the normal working class
standard of the country in question. Equally tastes
and customs differ in
different countries; while tea is the obvious beverage
to include in the a U.k index ,
it would be of little relevance to an index for France , where coffee is the main
drink of the same type. It would
be easy to elaborate upon these difficulties , but it should
be clear from what has been
written that little statistical
precision can be given to
any comparison of the
purchasing power of two
currencies and that gold no
longer serves as an arbiter. A concept
which at first sight might be thought
to be similar to the idea of
comparing the purchasing power of different
currencies is that of the
Terms of Trade. The terms of
trade of any country are an
assessment of the relative prices of its
imports and exports. If prices of exports
rises while that of imports falls
the terms of trade are said to be
favourably affected. If a reverse occurs they are said to be adversely affected. Part of Britain’s
trading difficulties in the post -1945
period arise from the fact that the average price
of her imports has risen very much
than the average price of her exports. The board of trade publishes indices
for the average prices of imports and exports and it also
publishes an index of the
terms of trade . This is based on
the year 1970 (=100) and an upward movement of it is adverse.
Organization Of Foreign Exchange Market- The London
foreign exchange market consist of
two groups but first of all , the London foreign exchange market is the
mother of most stock exchange especially in countries like Nigeria, where
British had as it’s crown colony, before the Nigerian independence in Oct 1st 1960.Same influence goes too with Ghana and
most of other former British crown colonies. These two groups of the foreign
exchange market are (a)Principals or Dealers (b) Brokers.
(A)
Principals/Dealers-The principals comprise
British and foreign banks and other financial houses acting through their specialist servants termed dealers. They are the actual buyers and sellers of currencies.There are some 120
of these principals and all are
of course of impeccable financial
standing so that business takes place
between them in perfect
confidence. No institution that
was not known to be good
on charge for any amount could
operate in the exchange market. The name would not
be taken by members. Of dealers
in the service of the principals there
are may be all told about 300. The eastern , southern
African and Australian exchanges
are separately organized and dealings
in these currencies differ
from dealings in continental and American currencies to which
article is confined.
(B)
Brokers- The foreign exchange brokers
association comprises about
forty members. They act
purely as intermediaries between
the dealers. Their function-under
free conditions –is to ascertain the exchange rates
at which business can be
done and then to link up
a buying dealer with a selling dealer or vice versa.
Usually a broker specializes
in the one currency or a
particular group of currencies . He quotes a two –way rate for example Paris 927.65-987.35 meaning that the
market sells at Fcs .987.35 to the £1 and buys at 972.65 to the £1.
But business is done
between these limits which
indicate rather the range
of dealing. Only when he has linked up two
dealers and concluded a transaction
does he disclose to whom the one
has sold and from whom the other
has bought. The broker
is not interested in the rate ,
except to discover what
the rate is . His services are
rewarded by a small brokerage which he
charges to both dealers.A broker must
not buy and sell on his own
account and he may not deal with any but a
recognized principal or
direct with any foreign bank.
Course
Of Business- The foreign exchange market
is exclusively a telephone
market, but with the internet introduced , it also plays a vital role.
All business is transacted by telephone
via internet calls, the dealers and the brokers being
linked up by private wires. When a broker has completed
a transaction on behalf of two principals , he sends with an hour
to the buying dealer a bought note and to the selling dealer a sold note.
These contract notes
give particulars of the currency bought
and sold , the rate which the deal
was done , the names of the buyer
and seller , the value date and the
amount of the broker’s commission .This brokerage is the
sole interest that the broker
has in the transaction. Once very month he sends an account
for brokerage to the principals
for whom has an acted. When the two
dealers receive their contract notes
they communicate with each other and confirm
the details.
Value Date- The value date is the day
specially agreed or by custom
understood , when the
currency bought is to be
paid over in the foreign centre against the equivalent sterling paid in London. This ensures an equitable settlement avoiding
loss of interest. Interest begins
to run from the
value date . Unless a special
date is arranged at the time
of dealing , the customary value
date is for example for Berlin and Washington D.C two days , for Lisbon three days
and for Bucharest seven days.
When the currency and the sterling change
hands on the same day
the transaction is said to be
valeur compensee or “here and
there” no interest being lost
by either buyer or seller. The
brokers’ work is highly skilled
and very exacting for it is done at high speed. But if the broker is efficient- principals would discontinue
telephonic communication
with him if he
were not his chances of loss
through quoting rates
that he cannot justify in the market
are not serious. It is otherwise
with the dealers . As servants , they are
there to make profits for their principals. They must know exactly from moment to moment
how they stand as regards each
currency in which they deal. For this purpose the dealer
runs a Position Sheet for each currency , entering at a time
of a sold in the sold
column and balancing the two columns at
frequent intervals. The dealer is
thus in a position to know
whether he is short or long
in any currency that is whether
he has over-sold or over-bought. The dealer’s aim
is to avoid carrying a large
open position in any currency, either debit or credit
and at the end of the day
to have a fairly even
book in each currency. The joint
stock banks are not
speculators in exchange but other
institutions might at times take a view
of the movements of a particular
currency and purposely run a large debit
or credit balance in that
currency in the hope of
making a loss. The banks
must , however , keep
currency balances with their foreign correspondents, in order always
to be in a position to
satisfy their customers’
requirements and these in cases
may well be of large amount.
The Foreign Exchange Department of A Bank-Unless or a joint stock
bank has an affiliated
branch in foreign centre – a few British
banks all have its operations abroad/ overseas are
conducted through its duly
appointed banking agents correspondents
and the British in the foreign centres , the foreign correspondents and the British principals, please note *
when British is referred to in this topic ,it also applies to all other
countries with the British Banking Models.* each performing reciprocal
services. The British Banks run
Current Accounts with
their foreign correspondent
and so also do the foreign correspondents with their British correspondent
and at frequent intervals these accounts must be reconciled.
Interest is charged or
allowed on these accounts
at the bank rate prevailing in the
centres where accounts are kept. Accounts may be kept
in sterling or in currency to record the
British banks’ own transactions
in a particular currency or to their
customers holdings of that currency. An account
maintained by a British
bank abroad is referred
to as a NOSTRO (Our) Account and by the foreign correspondent’s account
as a VOSTRO(Your) Account. Conversely
a foreign correspondent’s account
kept with a British Bank
is his Nostro account and to the
British bank the correspondent’s Vostro account. All actual buying and selling
of foreign currencies is
done by the foreign exchange Department. This Department is a separately
organized department of foreign
branch domiciled at the head
office of the bank , The foreign branch
treats it’s own head office , every one of the bank’s
branches , every foreign bank,
indeed every body with whom
it has dealings as its own customers. There are two exceptions
to this rule . In this case of the bank’s own branches , the actual settlement is effected through the head office and some
of the largest branches
may be in direct communication
with the
bank’s foreign correspondents ,
while others may buy currency
through the foreign exchange
department and sell it off to
their customers . This segregation is carried
a step further in the foreign branch itself
for each department of that branch treats each of the others
for book- keeping purposes as
its own separate customers.
In
addition to the foreign exchange
department spot and forward –the
foreign branch of the Joint stock
bank may include
the following-
(a)
Accounts Department.
(b)
Department
for the collection or
negotiation of foreign bills.
(c)
Outward
Credits Department.
(d)
Department for the issue of drafts
, mail and cable transfers.
(e)
Foreign
coupons and securities department.
(f)
Foreign Notes
Cashier.
(g)
Cables
and correspondence Department.
All, day long, the different
classes of business undertaken
by these departments pour into
the foreign branch from
the head office itself , the bank
‘s branch offices , foreign banks
and private persons at home
and abroad and where they
involve the purchase or sale
of currencies , instructions are passed
on to the foreign exchange department. It will be well appreciated that a highly
important duty of the accounts department
is on the morning of each
day to inform the dealers
of the foreign exchange department
of the exact state of the
accounts as between head office
and its foreign banking correspondents and of every department
of the foreign branch ,
whose operations involve
debit or credit entries
in the books of the bank’s foreign
banking correspondents and so
to keep the foreign exchange
department punctually advised.
No comments:
Post a Comment