# Introducing Exchange Rates

## In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another.

#### Key Points

• Exchange rates are determined in the foreign exchange market, which is open to a wide range of buyers and sellers where currency trading is continuous.

• In the retail currency exchange market, a different buying rate and selling rate will be quoted by money dealers.

• The foreign exchange rate is also regarded as the value of one country’s currency in terms of another currency.

#### Terms

• The amount of one currency that a person or institution defines as equivalent to another when either buying or selling it at any particular moment.

#### Figures

1. ##### Exchange Rates

In the retail currency exchange market, a different buying rate and selling rate will be quoted by money dealers.

In finance, an exchange rate (also known as a foreign-exchange rate, forex rate, or rate) between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency (Figure 1). For example, an inter-bank exchange rate of 91 Japanese yen (JPY, ¥) to the United States dollar (USD, US$) means that ¥91 will be exchanged for each US$1 or that US\$1 will be exchanged for each ¥91.

Exchange rates are determined in the foreign exchange market, which is open to a wide range of buyers and sellers where currency trading is continuous. The spot exchange rate refers to the current exchange rate. The forward exchange rate refers to an exchange rate that is quoted and traded today, but for delivery and payment on a specific future date.

### How the Foreign Exchange Market Works

In the retail currency exchange market, a different buying rate and selling rate will be quoted by money dealers. Most trades are to or from the local currency. The buying rate is the rate at which money dealers will buy foreign currency, and the selling rate is the rate at which they will sell the currency. The quoted rates will incorporate an allowance for a dealer's margin (or profit) in trading, or else the margin may be recovered in the form of a commission or in some other way.

Different rates may also be quoted for different kinds of exchanges, such as for cash (usually notes only), a documentary form (such as traveler's checks), or electronic transfers (such as a credit card purchase). There is generally a higher exchange rate on documentary transactions (such as for traveler's checks) due to the additional time and cost of clearing the document, while cash is available for resale immediately.

#### Key Term Glossary

commission
A fee charged by an agent or broker for carrying out a transaction
##### Appears in these related concepts:
cost
A negative consequence or loss that occurs or is required to occur.
credit
##### Appears in these related concepts:
credit card
A plastic card, with a magnetic strip or an embedded microchip, connected to a credit account and used to buy goods or services. It's like a debit card, but money comes not from your personal bank account, but the bank lends money for the purchase based on the credit limit. Credit limit is determined by the income and credit history. Banks charge APR (annual percentage rate) for using money.
currency
Paper money.
##### Appears in these related concepts:
exchange
An act of exchanging or trading.
##### Appears in these related concepts:
exchange rate
The amount of one currency that a person or institution defines as equivalent to another when either buying or selling it at any particular moment.
##### Appears in these related concepts:
exchange rates
In finance, an exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies is the rate at which one currency will be exchanged for another.
##### Appears in these related concepts:
finance
The management of money and other assets.
##### Appears in these related concepts:
foreign exchange
The changing of currency from one country for currency from another country.
##### Appears in these related concepts:
market
one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services (including labor) in exchange for money from buyers.
##### Appears in these related concepts:
money
A legally or socially binding conceptual contract of entitlement to wealth, void of intrinsic value, payable for all debts and taxes, and regulated in supply.
##### Appears in these related concepts:
profit
Total income or cash flow minus expenditures. The money or other benefit a non-governmental organization or individual receives in exchange for products and services sold at an advertised price.