What is an exchange rate?

An exchange rate is the value of one currency when measured against the currency of a foreign country, according to Investopedia. To determine the exchange rate, the calculations require both the domestic and the current currency.

The exchange rate varies based on a number of factors, including inflation, the health of the economy, political stability and interest, as reported by Business Dictionary. It is the difference between the value of the domestic currency and the value of the foreign currency. In most cases, the U.S. dollar serves as the base rate for such calculations. When two foreign currencies are used to determine the exchange rate, this is called a "cross rate."