In finance, the exchange rate between two currencies specifies how much one currency is worth in terms of the other. For example an exchange rate of 120 Japanese Yen to the Dollar means that ¥120 is worth the same as $1. An exchange rate is also known as a foreign exchange rate, or FX rate.
In practice it is rarely possible to exchange currency at the rate quoted. Market makers who match together buyers and sellers will take a commission. This is achieved by quoting a bid/offer spread. For example if you are bidding to buy Japanese yen you would do so at the bid price of say, ¥115 per dollar, and if you were offering to sell yen you might do so at ¥125 yen per dollar.
If a currency is free-floating its exchange rate against other countries can vary against other such currencies. In fact such exchange rates are likely to be changing almost constantly as quoted by financial markets and banks around the world. Big foreign exchange trading centres are located in New York, Tokyo, London, Hong Kong, Singapore, Paris and Frankfurt amongst others. If the value of the currency is "pegged" its value is maintained by the government in question at a fixed rate relative to the other currency. For example, in 2003 the Hong Kong dollar was pegged to the United States dollar.
Foreign exchange options are derivatives of exchange rates.
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