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The exchange rate is defined as how much your currency is worth when traded for another country’s currency. It represents the value of one currency in relation to another and is crucial for international trade and finance. Understanding the exchange rate helps individuals and businesses to calculate the actual cost of purchasing foreign goods and services or to understand the value of investments in different currencies.

For example, if the exchange rate between the U.S. dollar and the euro is 1.20, it means that 1 U.S. dollar can be exchanged for 1.20 euros. This definition captures the essence of currency exchange, as it involves direct conversion between two different currencies at a specified rate, which can fluctuate based on various economic factors such as inflation, interest rates, and geopolitical stability.

In contrast, the other options represent different concepts: the price of goods in different currencies refers to how items are priced internationally, the interest rate applied to foreign loans relates to borrowing costs rather than currency value, and the balance of trade between two countries refers to the difference between the value of exports and imports, not to exchange rates.