The exchange rate (also the foreign exchange rate, forex rate, fx rate or agio) is the price in which a foreign currency can be expressed or exchanged for another currency, i.e. between two currencies, it is the rate at which one currency will be exchanged for the other.
For example, if the exchange rate for the Euro (EUR) towards the American Dollar (USD) is 1.28, it means that 1,00 EUR equals 1,28 USD.
Exchange rate in practice: How are exchange rates established? The exchange rates of freely exchangeable courses are created on the electronically interconnected world-wide foreign exchange market and the value of the individual currencies in relation to other currencies is established solely through supply and demand on the market. The rates of some currencies, however, are fixed and set administratively by the respective state.
The exchange rates for individual currencies form part of the exchange rate tables which are usually issued daily by the respective national bank and which are subsequently adopted by individual commercial banks and other subjects (exchange offices and other financial institutions) which work with exchange rates for their own exchange rate tables.
Exchange rates in praxis: Exchange rates significantly influence the behaviour of the economy of a given state and they affect especially those enterprises which are involved in international trade. As the rates for most currencies are established by the market, they practically change continuously. Companies therefore use various means and financial instruments to protect themselves from currency exchange rate fluctuations (the so-called exchange risks), or they attempt to earn money on the exchange market (e.g. hedging, currency swaps, currency forward, exchange options, etc.).