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I was discussing exchange rates with a friend and realized we have a different understanding of how they work. We both understand that floating exchange rates are dictated by market forces (supply/demand) and can fluctuate from day to day.

However, we disagreed about how "the" exchange rate is set and whether there is a single universal exchange rate between two given currencies at any time. We both acknowledged that different currency exchange services will offer different rates depending on how much of a margin they take. We disagreed on whether there is a universal rate that an exchange service would use if not operated for profit (e.g. a free currency exchange service provided by one's bank).

My friend seems to think that there is a single universal "trading price" between two currencies at any given time, and that this is the rate a not-for-profit exchange of currency would take place. I think he believes this is the number you get if you just Google the exchange rate between two currencies.

My understanding is that there is no universal rate at any given time, and "the" exchange rate you see when you do a web search is just an average of recent trading prices. This would mean that a bank or other service performing a not-for-profit exchange would not necessarily follow the same exchange rate you get when you look up the current rate.

Which conception is more accurate? If my friend's conception is more accurate, is there some agency responsible for setting "the" current exchange rate between floating currencies?

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there is no universal rate at any given time, and "the" exchange rate you see when you do a web search is just an average of recent trading prices

Yes this is correct. There is no single universal rate. In Fx there is a loose term call market place, it is not a single exchange. Similar to stocks [but slightly different]; there are buy order and sell order by Banks/Fx Trading Companies/Large Corporates.

There is a single rate where some sell p of X currency for q of Y currency. For the very next trade, it can be p+/-Delta of X currency for q+/-Delta for Y currency.

After this there is a spread. Plus other factors that would determine why Fx is cheap at some institution at some point compared to others.

"the" exchange rate you see when you do a web search is just an average of recent trading prices

Yes it is average. Plus the average maybe only from few market places for large orders.

On currency pairs that are not directly traded, it is a artificial triangulated rate.

For example if you want to convert Papua New Guinean into INR or any of tons of other currencies, the rate is hopped via either a USD, GBP, AUD, CAD, EUR, HKD etc.

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    Note that even though there are many exchanges that trade FX, the prices of heavily-traded currencies tend to be almost exactly the same from venue to venue. (If they weren't then there would be an arbitrage opportunity.) So the "averaging" in that case is not really needed. On the other hand, what Google shows or what any given bank/credit card company/Western Union/airport kiosk decides to charge you is completely up to them and how much profit they think they can make off their customers.
    – dg99
    Nov 17, 2017 at 17:51

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