contracts of
exchange for future delivery plays a vital part.

Take the case of a banker who has bought and remitted to his foreign
correspondent a miscellaneous lot of foreign exchange made up to the
extent of one-half, perhaps, of commercial long bills with documents
deliverable only on "payment" of the draft. That means that if the
whole batch of exchange amounted to L50,000, L25,000 of it might not
become an available balance on the other side for a good while after it
had arrived there--not until the parties on whom the "payment" bills
were drawn chose to pay them off under rebate. The exchange rate, in
the meantime, might do almost anything, and the remitting banker might
at the end of thirty or forty-five days find himself with a balance
abroad on which he could sell his checks only at very low rates.

To protect himself in such case the banker would, at the time he sent
over the commercial exchange, sell his own demand drafts for future
delivery. Suppose that he had sent over L25,000 of commercial "payment"
bills. Unable to tell exactly when the proceeds would become available,
the banker buying the bills would nevertheless presumably have had
experience with bills of the same name before and would be able to form
a pretty accurate estimate as to when the drawees would be likely to
"take them up" under rebate. It would be reasonably safe, for instance,
for the banker to sell futures as follows: L5,000 deliverable in
fifteen days; L10,000 deliverable in thirty days, L10,000 deliverable
in from forty-five to sixty days. Such drafts on being presented could
in all probability be taken care of out of the prepayments on the
commercial bills.

By figuring with judgment, foreign exchange bankers are often able to
make substantial profits on operations of this kind. An exchange broker
comes in and offers a banker here a lot of good "payment" commercial
bills. The banker finds that he can sell his own draft for delivery at
about the time the commercial drafts are apt to be paid under rebate,
at a price which means a good net profit. The operation ties up
capital, it is true, but is without risk. Not infrequently good
commercial "payment" bills can be bought at such a price and bankers'
futures sold against them at such a price that there is a substantial
profit to be made.

The other operation is the sale of bankers' futures, not against
remittances of actual commercial exchange but against exporters'
futures. Expo