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Question
An investor earned a 5% nominal rate of return over the year. However, over the year, prices increased by 2%. The investor's real rate of return was less than his nominal rate of return.
Answer
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A macro hedge is a hedge of a particular asset or liability exposure to a change in a macroeconomic variable.
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Due to convexity problems, banks are actually better off using the simpler repricing model to manage interest rate risk rather than the duration model.
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If a bank has a negative repricing gap, falling interest rates increase profitability.
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