Note that, in contrast to (1), (2) is subject to exchange-rate risk as the realised return of the long-bill investment depends on the, a priori unknown, rate of a sight-bill at future date t + m.
Table 1 Description of the data set Variable Unit Description (S_{t}^) Continental currency per £ (in logarithms) Exchange rate in terms of the price of a sight-bill payable in sterling as traded in continental currency.
Upon maturity, the amount of foreign currency payable had to be invested in a sight-bill issued on London at the expected sight-rate (Eleft [S_{t+m}^right ]).
Across the main financial centres on the European continent, columns (5) to (8) of Table 2 summarise the results involving a combined investment in long-bills issued in London with a sight-bill transaction on London upon maturity.
Furthermore, since the long-rate of exchange is always above the sight-rate, a buyer of a long-bill in London could be almost certain to earn an implicit return in terms of receiving more French francs than he would have to lay out for a sight-bill.
In essence, a bill of exchange was a written order by an issuer, called the drawer, instructing a counterparty2, called the drawee, to pay a certain amount of money at a specific place either immediately (sight-bill) or at the end of a given usually 3 months term to maturity (long-bill).
In brief, these bills were called "sight-bills on London" and the corresponding exchange rate was called the "sight rate in a given continental city on London".
Furthermore, there are exchange rates derived from sight-bills issued in a continental financial centre (and currency) and payable in sterling in London within a week ((S_{t}^)).
Depending on the country, the type of bill, or the value of a transaction, sight-bills were typically subject to smaller, or were even exempted from, stamp duties (see, e.g. Tate 1908).
Contemplating first the case of Paris, which was the most important financial centre after London (Cassis 2010, pp. 101ff)., the top left panel of Fig. 2 depicts the exchange rates derived from sight-bills in Paris on London as well as from long-bills in London on Paris.
In particular, following the modern literature and applying a logarithmic transformation (with the corresponding sight and long-bill rates being denoted by lowercase letters), the regression equation approximating the continental investment demand for bills of exchange of (1) is given by l_{t}- s_{t}^ = alpha + beta left(i_{t}^right)+epsilon_{t}.
