Foreign Exchanges
Sykes notes that foreign exchange is a very complex topic and cannot be sufficiently discussed in a few chapters, but he feels it necessary to address to the extent that it has an influence on the banking industry.
Traditional economics focuses on markets as if they are isolated, but even in the author's time this no longer held true. Goods and services are traded among nations around the world, money moves from one nation to another as a result, and even the market for money and credit has become international, with investors and borrowers being attracted by the most favorable terms offered wherever they are to be had.
Foreign exchange is simple enough when money consists of specie - though transporting precious metals over distances bears issues of cost, time, and security of the goods in transit. It is also complicated by the different value of specie in different markets (in a cash-strapped market, gold is more precious and "worth" more in exchange for other goods).
Other issues in foreign exchange are more accurately attributed to the value of currency: the denominations can be translated to their weight in specie (called the "Mint Par of Exchange"), but there is the inconvenience of redemption (one cannot spend rupees in London) and the certainty that redemption will be possible (given the reputation of governments for debasing their currency or refusing to redeem it at all).
Commerce can be facilitated by specifying the currency and location of payment in the contract, but this also leads to differing values. The lender in London prefers to be paid in London rather than travelling to Paris or New York to receive his payment, or bearing the cost for an agent to collect it and ship it to his offices. These costs are expected to be borne by the borrower in most instances.
At the time this book was written, British money was valued as international currency, simply by virtue of the breadth of the empire and bank branch offices in various locales where bills could be settled locally. It's also by virtue of an independent central bank that impedes (though does not always prevent) the state from making arbitrary changes to currency: the British pound is more stable and reliable than most other currencies.
Foreign bills are bought and sold at various financial centers. While they are generally traded at their exchange value, there is some variance due to local supply and demand for currency, such that if the number of people seeking to exchange Francs for Pounds exceeds those who are willing to accept Pounds for Francs, the value of the Franc will rise in that particular exchange until the shortage has been eliminated.
The daily fluctuations in currency exchange rates provides opportunities for speculators to participate in the market, who believe that their predictions will enable them to profit by buying a currency cheaply and selling it back more expensively, even during the course of a business day. Currency derivatives, which agree to trade at a given price on a future date, provide some stability for those involved in foreign business, but further exacerbate speculation and profiteering.
(EN: A great deal of finicky detail follows with multiple examples and scenarios, but these seem to add nothing to what has already been said.)