First thing first: what is an exchange rate?

Basically, an exchange rate is simply a price- the price of one country's currency expressed in terms of another country's currency. For instance, in July 2007, 1 British pound is equal to $2.06 in the U.S. Therefore, 1 GBP can buy you 2.06 USD on the international exchange market.
(http://www.x-rates.com/calculator.html)

The formula to calculate an exchange rate is as follows:

Exchange Rate = 1/Exchange Rate

Subsequently, to calculate the British-American exchange rate, you would calculate:

X = 1/2.06 = .4854

Now, what is arbitrage exchange?

Suppose the British-American exchange rate is 0.6. You could take 5 British pounds and exchange them for 10 American dollars. You could then take your 10 USD and exchange them back for pounds, thus giving up 10 USD and getting back 6 GBP... you've gained 1 GBP!

This is what an arbitrageur does. You don't create or destroy money, but cause the international exchange market to lose the 1 GBP that you, the investor, gained.

Of course, this is a much simplified version of what an arbitrageur would do. Such exploits are usually much more complex. In addition, since this activity is not beneficial to the market, other influences on the currency exchange market will seek to change exchange rates in order to minimize these opportunities.