Exchange Rate
An exchange rate is the price of one currency expressed in terms of another — for example, how many US dollars one euro buys. It is the figure used to convert money from one currency to another for trade, travel and investing. Rates quoted as EUR/USD show how much of the second currency (USD) equals one unit of the first (EUR), and they move constantly with supply and demand.
Worked example
The EUR/USD exchange rate is 1.08, meaning €1 buys $1.08. To convert €500 to dollars: 500 × 1.08 = $540. To convert $540 back to euros: 540 ÷ 1.08 = €500.
Why it matters
Exchange rates matter to any investor holding foreign assets, because returns must be converted back to the home currency and a moving rate can add to or erode gains. The common pitfall is ignoring the spread and fees: the rate a bank or broker actually gives you is usually worse than the headline "mid-market" rate, so the cost of conversion is easy to underestimate.
Frequently asked questions
What makes exchange rates change?
They move with supply and demand for each currency, driven by interest rates, inflation, trade flows, economic data and market sentiment. For freely traded currencies, rates fluctuate continuously throughout the trading day.
What is the difference between a spot and a forward rate?
A spot rate is the price for converting currency now, settling almost immediately. A forward rate locks in a rate today for an exchange on a set future date, used to hedge against currency movements.
Related terms: Currency Exposure, Base Currency