the contrary, rise in
money rates abroad caused such a paying off of foreign loans and
maturing finance bills that foreign exchange rose to the gold export
point and "covering" operations were conducted with extreme difficulty.
In the foreign exchange market the autumn of 1909 will long be
remembered as a time when the finance-bill sellers had administered to
them a lesson which they will be a good while in forgetting.

6. _Arbitraging in Exchange_

Arbitraging in exchange--the buying by a New York banker, for instance,
through the medium of the London market, of exchange drawn on Paris, is
another broad and profitable field for the operations of the expert
foreign exchange manager. Take, for example, a time when exchange on
Paris is more plentiful in London than in New York--a shrewd New York
exchange manager needing a draft on Paris might well secure it in
London rather than in his home city. The following operation is only
one of ten thousand in which exchange men are continually engaged, but
is a representative transaction and one on which a good deal of the
business in the arbitration of exchange is based.

Suppose, for instance, that in New York, demand exchange on Paris is
quoted at five francs seventeen and one-half centimes per dollar,
demand exchange on London at $4.84 per pound, and that, _in London_,
exchange on Paris is obtainable at twenty-five francs twenty-five
centimes per pound. The following operation would be possible:

Sale by a New York banker of a draft on Paris, say, for francs 25,250,
at 5.17-1/2, bringing him in $4,879.23. Purchase by same banker of a
draft on London for L1,000, at 4.84, costing him $4,840. Instructions
by the American banker to his London correspondent to buy a check on
Paris for francs 25,250 in London, and to send it over to Paris for the
credit of his (the American banker's account). Such a draft, at 25.25
would cost just L1,000.

The circle would then be complete. The American banker who originally
drew the francs 25,250 on his Paris balance would have replaced that
amount in his Paris balance through the aid of his London
correspondent. The London correspondent would have paid out L1,000 from
the American banker's balance with him, a draft for which amount would
come in the next mail. All parties to the transaction would be
satisfied--especially the banker who started it, for whereas he paid
out $4,840 for the L1,000 draft on London, he originally took in
$4,879.2