What are the costs of changing currency?

• A. Transaction Costs
• B. Tariffs
• C. Exchange Rate Risk
• D. Inflation

Answer: (A)

When you convert currency, the direct costs you pay are transaction costs. These are the fees charged by banks or currency exchanges, any commissions, and the spread—the difference between the rate you buy foreign currency and the rate you would get when selling. These are the explicit costs of the actual exchange. Tariffs are charges on goods crossing borders, not on currency conversion. Inflation describes a general rise in prices over time and isn’t a cost of changing money. Exchange rate risk is the possibility of a loss due to changes in currency values; it’s a financial risk, not a direct transaction fee, though it can become a cost if rates move unfavorably or you hedge. So the best answer is the transaction costs.