A Textbook on Foreign Exchange PDF
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A TEXTBOOK ON FOREIGN EXCHANGE By the same author The Case Against Floating Exchanges The Destiny of Gold A Dynamic Theory of Forward Exchange The Euro-Bond Market The Euro-Dollar System: Practice and Theory of International Interest Rates Foreign Exchange Crises The History of Foreign Exchange Leads and Lags: The Main Cause of Devaluation Parallel Money Markets (two volumes) Roll-Over Credits A Textbook on Monetary Policy A TEXTBOOK ON FOREIGN EXCHANGE PAUL EINZIG SECOND EDITION © Paul Einzig 1966, 1969 Softcover reprint of the hardcover 2nd edition 1969 978-0-333-07649-1 All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means, without permission First edition 1966 Second edition 1969 Reprinted 1970, 1972, 1973, 1974, 1977, 1979 Published by THE MACMILLAN PRESS LTD London and Basingstoke Associated companies in Delhi Dublin Hong Kong johannesburg Lagos Melbourne New York Singapore Tokyo ISBN 978-1-349-0050-6 ISBN 978-1-349-00506-2 (eBook) DOI 10.1007/978-1-349-00506-2 This book is sold subject to the standard conditions of the Net Book Agreement To SIR THEODORE GREGORY CONTENTS PREFACE TO THE SECOND EDITION ix PREFACE TO THE FIRST EDITION X 1 THE PosT-WAR SYSTEM oF FoREIGN ExcHANGE 1 2 ORGANISATION OF THE MARKET 15 3 How THE MARKET WORKS 28 4 TRANSACTIONS WITH CUSTOMERS 42 5 CovERING AND HEDGING 55 6 ARBITRAGE IN SPACE 65 7 TIME ARBITRAGE 76 8 INTEREST ARBITRAGE 85 9 SPECULATION 95 lO TECHNICAL ExcHANGE MovEMENTS 110 ll BASIC TRENDS OF EXCHANGES 123 12 MovEMENTS oF FoRWARD R,ATES 136 13 INVESTMENT CuRRENCIES 146 14 THE EURO-DOLLAR MARKET 153 15 THE INTER-BANK STERLING MARKET 163 16 RISKS, PRoFITS AND LossEs 170 17 OFFICIAL INTERVENTION 183 18 ExcHANGE CoNTROL 196 19 FoREIGN ExcHANGE PoLICIES 206 20 PAsT AND FuTURE oF FoREIGN ExcHANGE 217 APPENDix: THE A.B.C. OF FoREIGN ExcHANGE 233 BIBLIOGRAPHY 247 INDEX 249 vii PREFACE TO THE SECOND EDITION THE two years that passed since the publication of the first edition of this book witnessed many changes, and I took the opportunity of its reprinting for bringing it up to date. The devaluation of sterling made it necessary to make a number of alterations in addition to the obvious need for adjusting the figures relating to parities and exchange rates. The lessons taught by the unsuccessful defence of sterling are duly noted in this edition. It was also necessary to cover some institutional changes, such as the spactacular expansion of the Eurocurrency markets and its increasing use by American banks as a second ary money market, the development of a market in dollar certificates of deposits, etc. Mter some hesitation I decided to omit from this edition my table of parities and support points The devaluation of sterling, the Danish Krone and the Finnish Mark, which occurred since the publication of the table, would have made it necessary to carry out extensive revision, and it appears highly probable that there will be other devaluations that would make the revised table out of date. When I asked a leading banker whether it would be worth while to take the time and trouble needed for revising it his answer was in the negative. "Those who are interested in the table are familiar with its figures", he told me, "while those who are not familiar with them are not interested in them." P.E. 120 CLIFFORD'S INN, LONDON, E.C.4 October, 1968 ix PREFACE TO THE FIRST EDITION I HAVE undertaken to write this book in response to sugges tions both from banking and academic quarters. It has been felt for some time that post-War students of foreign exchange are not served adequately by the existing literature on the sub ject. Before the War there existed some excellent textbooks among others those of Spalding, Thomas, Evitt and Crump - but, even though some of them were revised as recently as the early 'sixties, it is widely felt that their material has not been brought sufficiently up to date. Their authors deserve credit for the excellent pre-War material they had produced, and their omission to cover the changes that have occurred since the War is understandable. l\Iy criticism of their revisions is tempered by my knowledge from personal experience how reluctant authors are, when revising their books, to jettison obsolete but otherwise satisfactory material. There is always a strong temptation, reinforced by the law of inertia, to retain as much as possible. In any case, owing to the high post-War cost of major alterations in the setting, publishers always insist on keeping changes as far as possible within the existing pagina tion, emulating Procrustes in forcing their victims into a pre determined space. The best way of breaking away from pre-War material is to try to forget about it altogether and start from scratch instead of trying to patch up a pre-War book. Having regard to the far-reaching changes both in the basic foreign exchange system and its techniques and practices, as well as in the background against which that system operates, it seems that nothing short of a completely new book with a genuinely post-War approach, and written in a post-War mentality, can meet post-War requirements. This task can best be undertaken by someone who has not written a textbook on foreign exchange before the War and is X Preface to the First Edition not, therefore, mentally committed to the pre-War system. While I am the author of a number of pre-War books covering specific aspects of foreign exchange such as forward exchange, gold movements, exchange control, etc., I never attempted until now to produce a comprehensive book on foreign exchange covering the entire subject. Being thus "uncommitted" to the pre-War system I feel justified in making this attempt to fill a genuine gap in post-War financial literature. To illustrate the imperative need for breaking with the past, let it be sufficient to quote one or two characteristic survivals of pre-"'War facts in post-War editions of pre-War textbooks. Some authors, in their arithmetical illustrations of post-War practices, continue to quote pre-War exchange rates. This is admittedly a minor matter, but surely students are entitled to something more up to date than calculations based on rates such as $4·86 to the pound or 124 francs to the pound, even if the method of calculation is the same whatever be the rates. All post-War editions of pre-War textbooks contain lengthy and detailed descriptions of the operation of the gold points mechanism, illustrated with a multitude of examples for cal culating gold points. If there were a possibility of an eventual return to that system - as indeed there had appeared to be during the 'thirties-it would be justified to devote some space to it, in spite of the fact that at the time of writing it is of purely historical interest. Since, however, the trend of evolution does not point in that direction - even the so-called gold standard advocated by General de Gaulle only envisages more extensive gold transactions between monetary authorities in which gold point calculations would play no part - it would be useless to burden students, and others interested in the foreign exchange system as it operates today, with a detailed treatment of such obsolete material. I have also felt justified in excluding material, which occupies a high proportion of the space in pre-War textbooks and even in their post-War editions, dealing with international transfers through transactions in various types of bills of exchange, letters of credit, travellers' cheques, mail transfers, etc. These practices still exist, but their sum total constitutes xi
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