What does "exchange rate" refer to in finance?

The term "exchange rate" refers specifically to the value of one currency in relation to another currency. This value determines how much of one currency you would need to spend to buy a unit of another currency. For example, if the exchange rate between the US dollar and the euro is 1.20, this means that 1 US dollar can be exchanged for 1.20 euros.

Understanding exchange rates is crucial for international trade, investment, and tourism, as they directly impact the cost of goods and services between countries. Accurate knowledge of exchange rates helps businesses to strategize their pricing and manage currency risk when dealing in multiple currencies.

Other choices do not define "exchange rate" accurately. The interest rate offered by banks pertains to loans or deposits, the price difference between goods focuses on arbitrage opportunities rather than currency valuation, and the rate for physical cash is not the same concept as the exchange rate, which is typically more about the value relationship rather than the logistics of currency handling.