The Foreign Exchange Market of the XXI Century: The Pound and BRIC Currencies

The purpose of this study is to analyze if the foreign exchange turnover of Brazil, Russia, India, and China could make up for the foreign exchange turnover of the British pound if the pound opts to join the euro.
            This study analyzes that the foreign exchange market has been affected by three major transformations in the past twenty years. It has grown in size to become one of the most liquid markets; the number of European cross-rates has decreased with the introduction of the euro; and, the economies of Brazil, Russia, India, and China (BRIC) are growing in such a way that their currencies are growing in importance and catching the attention of investors. 
            The aim of this study is threefold. Anchored in the debate that since the introduction of the euro spurred around England’s reluctance to join the common currency, this study first analyzes the effect that the disappearance of the British pound would have in the foreign exchange net daily turnover in the spot, forwards, and swaps markets. This study measures the bid-ask spread to calculate the cost for individuals and the benefit for foreign exchange market makers if England were to adopt the euro. Secondly, it sheds light on the relationship between the pound vis-à-vis the euro and the U.S. dollar to understand their currency ¨cycle.¨ Finally, this study takes a look at the convertibility and liquidity of Brazil, Russia, India, and China (BRIC) national currencies and their potential to make up for the foreign exchange turnover gap that the pound will create in case it joins the euro.