Forex

The variations found in the above rates on foreign bills are due largely to the element of time, and conse-quently of interest, which enters into the remitting of drafts. Banks quote the highest rate on their cable transfers, for these orders are payable immediately upon presentation by the payee. In the case of a sterling cable transfer, only a few hours elapse between the sale by the bank in New York and the surrender of funds to the beneficiary in London. A demand draft is forwarded by mail, and even on the fastest steamer it reaches the payee at least after seven days have passed. Meantime the bank which sells the draft has full use of this portion of its foreign balance, and is thus able to quote a cheaper price on demand drafts than on cable transfers. From the above table it is seen that the greater the difference of time in which the funds become available, the lower is the quotation on the bill because of the difference in the interest charge. The element of time, and therefore of interest, does not enter into the quotation on cable transfers, which represent the exact market relationship between dollars and sterling in the above table, or between any two other currencies. The cable-transfer rate, therefore, is fundamental in determining the price of all other bills.

Rates on the various classes of bills are determined also by the extent of the credit risk involved. The credit factor is usually of minor influence in fixing the rates on bankers' bills. They are called prime bills when accepted by the stronger institutions, and all are usually considered of the same value. If a bank should place upon the discount market a volume of bills unwarranted by its resources, such policy would soon operate to depress rates quoted on its drafts.. A differentiation is sometimes made between one-name and two-name bankers' bills. Those drawn by a bank on its foreign branch or on an affiliated institution will ordinarily bring a lower rate of exchange because of the...