In finance, the exchange
rate between two currencies
specifies the 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 Chinese
yuan was pegged to the United
States dollar.
