Definition
An exchange rate is the price of one currency expressed in another currency. It is set by supply and demand under a floating regime, or managed within limits by policy under a peg or band.
How it works
Spot rates apply to near-term delivery, while forward rates apply to a later date and reflect interest-rate differences between the two currencies. Rates offered to customers usually include a markup over the wholesale mid-market rate, so the rate you get when converting cash is worse than the one shown in news and charts.
Regimes differ: floating currencies move with market demand, whereas pegged or managed currencies are held within a policy band, as with the Hong Kong dollar's link to the US dollar. Changes are usually quoted as percentages, and their direction depends on which currency is the base.
Formula / convention
Converted amount = amount × exchange rate (quote units per 1 base unit); percentage change = (new rate − old rate) ÷ old rate × 100
Illustrative example
Illustrative: GBP/USD has a mid-market rate of 1.3000, and a bank converts 5,000 pounds at a customer rate of 1.2870. You receive 5,000 × 1.2870 = 6,435 US dollars instead of 5,000 × 1.3000 = 6,500, a shortfall of 65 US dollars, or 1.0% of the mid-market value.
What to watch for
A headline exchange rate is rarely the rate you can actually transact at, because margins, fees and timing change the result. A rate quoted today is also not a forecast of any future rate.