197. Arbitraging In Exchange

This is another important part of the activity of the foreign department. Arbitraging may best be described as the purchasing of exchange on one country through another country. Conditions often arise, for instance, which make it cost less dollars to send a given number of francs to Paris by buying them in London, with a sterling bill, than to buy them here in New York.

198. Arbitraging Illustrated

To illustrate with a concrete case: Suppose a banker in New York sells a 25,-250 franc draft on Paris, at the rate of 5.17 1/2 (5 francs, 17 1/2 centimes to the dollar). That means that he realizes from its sale $4,879.23. Making up his mind to cover through London, he finds that the check-rate on London is 484, which means that he can buy a £1,000 draft on London for $4,840. Cabling to London, he finds that the rate there on Paris is 25.25 (£l = fcs. 25.25) and that £l,000 will therefore exactly buy the francs, 25,250, he needs. He goes ahead, therefore, and pays out $4,840 for the £1,000 draft on London, sends it to London with instructions to his correspondent to buy with it francs 25,250, and directs that these francs be sent to Paris to the credit of his account. On the other side the transaction just matches off - he drew francs 22,250 on Paris and he has deposited there exactly the same amount. But on this end he is ahead. He took in $4,879.25 originally and has spent only $4,840.

199. Arbitraging Operations

This is of course only the simplest form of arbitrage but it is typical of transactions being continually made. A recent article in the New York Financier says:

In conducting such operations it is essential that the banker shall be advised, through the cable, of the varying conditions of the markets abroad. In such markets as Paris and London, where the exchange transactions are always large, rates often fluctuate sharply and conditions change frequently. Consequently, though the situation may be favorable one day it may suddenly become adverse, necessitating some modification of the method of arbitraging. Moreover it frequently happens that after a successful negotiation has been effected by a banker as the result of private information, his competitors may be advised of the favorable conditions prevailing and they also may draw in a similar manner. Hence each operator seeks to obtain for himself alone all possible information regarding changes which are likely to affect his business. Sometimes a banker may find, upon calculation, that it will be profitable to conduct arbi-traging of exchange between three or more points; in such cases the conditions at each of the points must first be ascertained and calculations have to be made with the utmost care. Occasionally in drawing bills the banker, in order to take advantage of abitraging operations, will transfer credits, through the cable, from an adverse center to a point favorable for his purpose. Indeed there are very many ways by which arbitraging can be profitably conducted by bankers having the requisite facilities and the necessary skill for such operations. It will be observed that operations in arbitraging of exchange require the services of men of the largest experience, and hence the business can be conducted to advantage only in the most thoroughly equipped offices. The exchange student who enjoys opportunities for practice in such offices and has the determination to qualify himself for this branch of exchange work by acquiring a knowledge of all of its intricate details will have no difficulty after such qualification in securing advancement. The field for operations in arbitraging of exchange is continually and rapidly broadening, and there will probably always be a demand for the services of men capable of taking positions as managers of exchange houses or departments.

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