There is really nothing particularly magical about exchange rates—they are quite simply a ratio of one currency to another.
When you look at a U.S. paper to find the exchange rates, you will find currencies generally quoted in terms of the U.S. dollar. In a foreign paper, they will generally be in terms of the local currency and (sometimes) in terms of the U.S. dollar. This is, to a large degree, a throw back to the post-Bretton Woods period when currencies were generally pegged to the dollar. It is also a recognition that many international contracts are written in terms of the U.S. dollar.
The spot market for currency trading is the figure most often quoted. This is the exchange rate for large transactions where the money will be exchanged today (or within 24 hours for large commercial transactions). This rate constantly changes and is the result of trading on currency exchanges scattered around the world. You will normally find that the listing in the newspaper is based upon closing rates at the NY exchange for the previous day. The rates themselves, however, fluctuate constantly during the course of trading.
You will also see the forward rate quoted in some papers, particularly the Wall Street Journal. This is the rate for currency transactions where the exchange of monies will occur on a specific date in the future—most often 30, 60, 90, or 180 days in the future. The difference between the spot rate and the forward rate reflects several factors, the most significant of which is the difference in interest rates between the two countries and the perceptions of traders and speculators regarding likely movements in the two currencies during the period.
Suppose that you wanted to convert 100 dollars into Mexican pesos. You look at an exchange rate table in the Wall Street Journal and find that the current rate is 7.75 pesos per dollar. To convert:
dollars × pesos / 1 dollar
100 dollars × 7.75 pesos / 1
dollar
100 dollars × 7.75 pesos /
1 dollar
= 775 pesos
pesos ×1 dollar / pesos
100 pesos × 1 dollar / 7.75 pesos
100 pesos × 1 dollar /
7.75 pesos
= 12.9 dollars
(Yes, it really is
that simple!)