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Suppose that the swap that you proposed in question 2 is now 4 years old (i.e. there is exactly one year to go on the swap). If the spot exchange rate prevailing in year 4 is $1.8778 = €1 and the 1-year forward exchange rate prevailing in year 4 is $1.95 = €1, what is the value of the swap to the party paying dollars? If the swap were initiated today the correct rates would be as shown:
Deadweight Loss
The reduction in economic efficiency that happens when equilibrium is not reached or is unattainable for a specific good or service.
Import Tariff
A tax imposed by a government on goods and services imported into its country to protect domestic industries from foreign competition.
Supply and Demand
Economic model of price determination in a market, showing the relationship between the quantity of goods that producers wish to sell at various prices and the quantity consumers wish to buy.
Specific Tax
A fixed amount taxed per unit of a good or service, as opposed to a percentage of the price.
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