A true interest arbitrage under normal conditions will tend to equalize short-term rates in the money markets of the two countries concerned. Its effect on foreign exchange rates, normally, should be to send the forward rate on the "dear-money" country to a small discount. But there are two other forms of arbitrage in the field of foreign exchange, both dependent on price or rate discrepancies, both tending to wipe out these discrepancies, and both independent of the forward market. One of these is exchange arbitrage and the other is gold arbitrage.
Exchange arbitrage is arithmetically complicated and, in actual practice, requires swift decision and lightning calculations by the arbitrager (who is almost invariably a banker). The principles of exchange arbitrage, however, are simple. It should be fairly obvious that where any two or more markets are closely linked by swift communications and are relatively free of man-made barriers, the prices of any given standardized article in the several markets will be uniform.
GOLD ARBITRAGE
Turn finally to gold arbitrage. Here even the terminology of the field is unsettled; if we take the liberty of setting up our own classification, it is only because in the last few years much confusion has arisen by the application of the term "gold arbitrage" to two distinct types of gold transaction through the foreign exchanges. As long as countries are on a gold standard which permits the free import and export of gold, it is from time to time profitable for bankers to do either of two things:
(1)If, in the home market, the price of gold is low relative to the current foreign exchange rate on a given country, the banker buys gold from, say, the treasury, exports it to that country, and sells exchange against it. Since the exchange is sold at the temporarily high market rate, the banker makes a profit, but his very act of selling exchange against the gold export increases the supply of that type of foreign exchange and hence reduces its rate or price.
(2) If foreign exchange (preferably cables) on a certain country is momentarily cheap as compared with gold in that country, the banker buys the cheap exchange, sends it to his agent abroad to be used for the purchase of gold, imports the gold, sells it to, say, the treasury, and pockets the profit. The purchase of exchange increases the price of it and tends to eliminate the margin of profit in further gold arbitrage.
This gold arbitrage, under a gold standard, is the process which prevents foreign exchange rates from moving above or below par by more than the cost of buying and shipping gold, plus a small margin to make the gold arbitrage profitable. As in any true arbitrage, the arbitrager is not speculating. He figures his margins before he enters the transactions and does not incur an exchange risk.
When foreign exchanges are on a limited gold or a paper basis and the "gold points" are no longer operative, this sort of gold arbitrage is no longer possible. Yet, rather unexpectedly, a new form of arbitrage involving gold has developed which is dependent on the existence of some form of gold market in at least two countries and some degree of freedom in the export and import of gold. If, in two countries, there are both free gold markets and freedom to export and import gold, arbitrage may occur in either direction. Other sets of conditions may exist, however. One country may have a free gold market and permit the export and import of all gold dealt in on that market, while a second country may allow gold import only for immediate sale to the treasury. In this case, as long as the treasury will buy imported gold freely at an announced price, gold may be arbitraged from the gold market to the treasury, but not in the reverse direction unless the treasury will license gold exports.
No comments:
Post a Comment