What does an exchange rate tell you?

The exchange rate tells the value of a currency after conversion to or from another currency (foreign to domestic or domestic to foreign).

An exchange rate basically works with two major components: base and counter currencies. The quotation process for an exchange rate can be direct or indirect. In the direct process, the foreign currency becomes the base currency, while the domestic currency becomes the counter currency. In an indirect quotation, the opposite happens.

As an example, say 1 US dollar = 1.25 AU dollar. Therefore, the exchange rate for a U.S. dollar is 1.25 Australian dollars, and the exchange rate from an Australian dollar to a U.S. dollar is 1 / 1.25 = 0.80.