How Exchange Rates Work

The Cost of Money

National currencies are vitally important to the way modern economies operate. They allow us to consistently express the value of an item across borders of countries, oceans, and cultures. We need exchange rates because one nation's currency is not always accepted in another. You can't walk into a store in Japan and buy a loaf of bread with Swiss francs. First, you'd have to go to a bank and buy some Japanese yen with your Swiss francs. An exchange rate is simply the cost of one form of currency in another form of currency. In other words, if you exchange 1 Swiss franc for 80 Japanese yen, you really just purchased a different form of money.

You can express that exchange rate as:

1CHF = 80JPY

Meaning that one Swiss franc costs 80 Japanese yen.