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Arbitrage in Bullion, Coins, Bills, Stocks, Shares and Options

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Arbitrage in Bullion, Coins, Bills, Stocks, Shares and Options W- 1 <<\ 8<>/'' ^iio MM^^ ARBITRAGE BULLION, COINS, BILLS, STOCKS, SHAKES AND OPTIONS ARBITRAGE IN BULLION, COINS, BILLS, STOCKS, SHARES AND OPTIONS CONTAINING A SUMMARY OF THE RELATIONS BETWEEN THE LONDON MONEY MARKET AND THE OTHER MONEY MARKETS OF THE WORLD BY HENRY DEUTSCH, Ph.D. SECOND EDITION— REVISED AND ENLARGED LONDON EFFINGHAM WILSON 54, THREADNEEDLE STREET, E.G. • '^ ^ 1910 - [All rights reserved'] 1 I Digitized by the Internet Archive in 2007 with funding from IVIicrosoft Corporation http://www.archive.org/details/arbitrageinbulliOOdeutuoft PEEFACE, Since the publication of the first edition, several countries have given up the silver standard, and have adopted a gold standard ; Germany has withdrawn the talers from circula- tion, and has established the pure gold standard ; the silver dealings in the East have been put on a new basis since 1906 ; the Paris bill market has introduced a new system for the quotation of foreign exchanges since 1907 ; France and England have lately increased the stamp duties for Stock Exchange dealings; international commerce has risen considerably during the last six years. The Author has taken all these changes into considera- tion, and has endeavoured to improve the book, and to render it as useful as possible. For this reason he has rewritten the pages treating of Chinese currency and arbitrage in bars. The figures given there are based upon metal shipments that have come within the author's own experience. The Author is much indebted to Consulates, Mints, and Banking Institutions, especially to Mr. C. S. Addis, manager of the Hong-Kong and Shanghai Banking Corporation in London, and to Mr. E. B. Skottowe, manager of the Chartered Bank of India, Australia, and China in Shanghai, and considers it his pleasant duty to express his warm thanks to them here. H. D. London, August, 1910. — PREFACE TO THE FIRST EDITION. The literature on the subject of the present book is remarkably meagre. We look practically in vain for any book in any language treating of the highly-important and likewise interesting subject of the transfer of money from one nation to another. The fact is all the more astonish- ing, as Arbitrage is of the greatest importance to the commerce of the world—see the paragraph " Introductory Remarks"—and as international trade has developed so enormously through the ever-increasing facilities of com- munication between the most distant business centres. A few books on mercantile Arbitrage, published in Germany some thirty or forty years ago, are now anti- quated, and therefore of little or no value. Qoschen's ** Theory of Foreign Exchanges" (dated 1866) treats the subject from a philosophical point of view, but without entering into any practical details ; and two other books, the best known of their kind—Tate's " Modern " Cambist," and Haupt's " Arbitrages et Parites —were last edited in 1893, and since then the following changes have taken place : (1) The currency of India, Russia, Japan, Austria- Hungary, Chile, and Costa Rica has been reformed. (2) The British dollar, and some foreign coins of a new type have been struck, and put into circulation. Vll (3) The Paris Stock and Share Market has been reorganized. (4) The South African Mining Shares, introduced since 1894 on the Paris Market, have become the principal articles for Arbitrage dealings between the Paris Bourse and the London Stock Exchange. " " (5) The creation of the 4 7o Spanish Sealed Bonds has done away with the Arbitrage in Exterior Bonds with the Madrid Bourse. (6) The silver quotation on the Paris Market, formerly given in per cent discount against the basis of fr. 218'89, is now expressed in francs per kilogramme. (7) The stamp duty on the Continental Bourses has been raised. During the last eleven years not a single publication has appeared on the book market of the world touching on the subject of the present work, which proposes to fill the gap m a concise but, nevertheless, exhaustive manner. It treats likewise of the relations between the New York Money Market and the Money Markets in the East, as the trade between the United States and Asia has grown beyond expectation during the last decade. The book deals with the various branches of the Arbitrage — I. Arbitrage in Bullion and Coins. II. Arbitrage in Bills of Exchange. III. Stock and Share Arbitrage, and IV. Arbitrage in Options—in separate chapters, and any section can therefore be used for instant reference. The Author has taken the greatest pains to render the work intelligible, and to bring it up-to-date. His long experience as arbitrager on the various Bourses has enabled him to lay particular stress on the practical part, and he therefore hopes that it will acquire numerous VIU friends amongst bankers, Stock Exchange men, economists, and financiers of all nations; and will likewise be found useful by capitalists generally, even those having but slight business relations beyond their own country. H. D. London, April, 1904. — C;ONTENTS. PAGB Introductory Remarks xiii-xvi Currency . 3-8 I. Arbitrage in Bullion and Coins. A. Gold. Monetary system of:— Great Britain—France—Germany—United States Austria-Hungary—Russia (and Finland)—Nether- lands — Scandinavia—Japan—Egypt —Uruguay Turkey—Portugal—Argentina—Brazil—Mexico . 11-42 Gold bars 43-46 Notes for practical purposes ..... 46 Coin parity table 47 Table for calculating foreign money between 50-55 B. Silver. Rupee — Mexican dollar — British dollar — Tael^ Maria Theresa taler—United States dollar . 55-76 Silver bars 76-83 Various currencies 84-94 II. Arbitrage in Bills of Exchange. European and American exchanges .... 97-133 Parity table 133 Eastern exchanges 140-147 Parities between New York and the East . 147-154 Coupons 155 ix . PAGE Bank Returns. Bank of England ..... 157 Principal European note-issuing Banks . 159-174 American Banks ..... 174-176 III. Arbitrage in Stocks and Shares. With the leading European Bourses . 183-205 With New York 206 With India (Rupee Paper) 208 With Constantinople .... 209 With Alexandria . 210 With St. Petersburg .... 211 IV. Arbitrage in Options. Call—Put—Put and Call . 216-221 Call of more—Put of more . 221-223 Options on the Paris and Berlin Bourse . 223-226 Time comparison table .... 227 Index 228 Advertisements 23:3 INTRODUCTORY REMARKS. The ** Arbitrage '* compares prices of articles of merchandise dealt in on various markets in order to find out their differences. The word '* Arbitrage " is French, derived from the '* verb arbitrer," which means to judge or estimate ; the person calculating the Arbitrage is called " Arbitrager," or "Arbitrageur," or " Arbitragist ". We may compare the prices of any article, whether expressed in EngHsh money or foreign money. Take for instance the article coffee. We may compare the price of a ton of best Brazil coffee in London with the price of the same quantity and quality coffee in Liverpool ; or the London price of the said quantity with its New York price ; or we may find out the lowest and highest price of the said coffee in London, Liverpool, Havre, Eio de Janeiro, New York and other markets at the same time. If we have found, for instance, that there is a consider- " able difference—also called ** margin —between the prices of London and Havre, and London is the cheaper market of the two, it would be profitable to buy in London and to sell in Havre. In consequence of these transactions the price of coffee in London would rise—because of our pur- chases—and in Havre go lower because of our sales, and ziii . XIV ultimately the price of coffee in London and Havre will show very little difference, and might become equal. The Arbitrage, therefore, equalizes the prices. It can supply a demand in one market from the stock of another. For instance, high wheat prices in one market will in- duce shipments from other markets with lower prices, and Arbitrage can therefore prevent exorbitant rates. A high money rate in one commercial centre cannot remain in force long, as capital from the other centres with lower rates will soon flow in, and cheapen the value of money. These examples will suffice to show the importance of Arbitrage for the commerce of the world. In the general sense of the term, we can therefore speak of Arbitrage in wholesale commodities, in freights, in bullion, coins, bills of exchange, and stocks and shares. But usually it is only applied to the comparison of prices of the last-named articles, lying in the line of bankers and financiers, and means especially the examination of the relations between the moneys of the different nations * ( * * Foreign Exchanges * ) These ** Foreign Exchanges'* express the rates at^ which payments from one nation to another are to be effected. The comparison of two prices when both are expressed in English money is simple enough—-a mere subtraction gives the difference. One of the prices which is taken as a " basis for the calculation is also called the ** parity price or, shortly, ** parity **. But when one of the prices is expressed in foreign money, and the quotation given for different quantities, the working out of the difference is more complicated, and the Arbitrager must be acquainted with the exact value of the foreign money, and the practice of the foreign market. Thorough knowledge of all the usages, and quickness at — — — XV figures in order to work out rapidly the difference in the prices (** margins ''), are therefore essential quaUfications for a capable Arbitrager. The solution of Arbitrage problems does not require a profound knowledge of mathematics, not even a familiarity with logarithms—not such as is demanded by a well-known writer on this subject for the calculations connected with ^ the Arbitrage in bills ; correct reasoning and reHable reckoning fully suffice.
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