An exchange rate refers to the rate or price at which one currency can be exchanged for another. Exchange rates are crucial for international trade, investments, and travel since they determine how much of one currency you can get in return for another. For example, if the exchange rate between USD and EUR is 1:0.85, this means one United States dollar is worth 0.85 Euros. Exchange rates fluctuate based on various factors such as economic indicators, market demand and supply, and geopolitical events.

They play an essential role in determining the value of transactions in cross-border trade. For instance, a company importing goods from another country pays its supplier in the supplier's local currency, requiring an exchange rate to calculate the equivalent amount in the importing company's currency. Understanding exchange rates is important for individuals and businesses alike, especially when performing currency conversions or engaging in activities that involve multiple currencies, such as accounting for transactions in different regions.