Before getting into the Spot Exchange Rate we must know what Exchange Rate means. Exchange Rate is also known as Foreign Exchange Rate, FX Rate or Forex Rate. The Exchange Rate specifies how much currency is worth in terms of another. The rate can go up or down depending on the demand for the foreign currency. For example, the exchange rate between the US dollar and the New Sol from Peru is $1 / S/.2.8539 or $.3504/S/.1 (please note that $ is the symbol for US currency and S/. is the symbol for Peruvian currency), currently the direct quote is given in the second format where the numerator is the home currency and the denominator is the foreign currency. So in this case the home currency (US) has more purchasing power because with a fraction of the dollar you can purchase one New Sol. However, if the demand for the New Sol increases then it appreciates in value shifting the exchange rate higher. Continuing with the example, if US firms increase their demand for Peruvian goods then the demand curve shifts upwards to the right setting a new exchange rate higher than the original exchange rate. In this circumstance the foreign currency has appreciated and the home currency has depreciated meaning that the US dollar has less purchasing power. The new exchange rate would be $.65/S/.1.

Exchange Rates are constantly changing by the second because the demand and supply for foreign currencies are constantly changing as well. This creates different spot rates at different times meaning that the spot rate is not fixed, it is the rate both firms or parties agreed to exchange currency within a determined period of time usually within 24 or 48 hours. The spot rate can be different for other two firms that agree to exchange currency at a later time even if it is within the same day. In today’s money market the US dollars trades 3.2 US dollars.

Sources:

http://www.ft.com/cms/s/0/c4c9c0f0-a78a-11dc-a25a-0000779fd2ac.html?nclick_check=1

http://online.wsj.com/mdc/public/page/2_3021-forex.html?mod=topnav_2_3100