A bank's bond portfolio has DV01 of Rs 12 lakh, concentrated in ten-year bonds. It hedges with five-year payer swaps with DV01 of Rs 4,300 per Rs 1 crore notional. Size the hedge, then work the P&L if two-year yields fall 10 bp, five-year yields fall 3 bp and ten-year yields rise 5 bp.

The hedge is about Rs 279 crore of five-year payer swaps, and after the twist the book loses about Rs 96 lakh: Rs 60 lakh on the bonds and Rs 36 lakh on the swaps. Rs 12 lakh divided by Rs 4,300 per crore gives the notional. That hedge is neutral if five- and ten-year rates move together, but here the ten-year rose 5 bp while the five-year fell 3 bp, so both legs lost. A ten-year swap, about Rs 169 crore, would have matched the risk where it sits.

Match the rupees per basis point. The bonds lose Rs 12 lakh for each basis point rise; each crore of five-year payer swap gains Rs 4,300. Rs 12,00,000 divided by Rs 4,300 is about Rs 279 crore of notional, which makes the book neutral to any move in which five- and ten-year yields change by the same amount. On a parallel 5 bp rise, the bonds lose Rs 60 lakh and the swaps gain Rs 60 lakh. That neutrality is real, but it is a statement about one kind of move.

Think of an umbrella held over your head while the rain blows in from the side: it covers you for the weather it was designed for and leaves you soaked in the weather you actually got. The bonds lose Rs 12 lakh times 5 bp, Rs 60 lakh, because ten-year yields rose; the payer swaps lose Rs 279 crore times Rs 4,300 times 3 bp, Rs 36 lakh, because five-year rates fell; the book is down Rs 96 lakh. The two-year move of 10 bp is the largest number in the question and touches neither position; it is there to see whether you place each position on the curve before computing.

Hedge the risk where it sits. Measure DV01 by tenor, often called key-rate DV01, and hedge each bucket with an instrument at the same tenor: here, about Rs 169 crore of ten-year payer swaps, which at roughly Rs 7,106 per crore per basis point match the Rs 12 lakh at ten years. In the twist, that hedge gains Rs 60 lakh as ten-year swap rates rise 5 bp, and the book is flat, assuming swap and bond yields at ten years move together. If the ten-year swap is too thin to trade in size, the desk can hedge with five-year swaps and run the five-to-ten-year curve risk deliberately, with a limit on it and a number for what a 10 bp twist would cost.

Two limits belong in the answer. A swap hedge of a government bond portfolio still carries the spread between swap rates and bond yields at the same tenor, which can move on its own when bank funding or government supply changes; a DV01 match does not remove it. And the Rs 4,300 and Rs 7,106 per crore are themselves estimates that change as rates move, so the notional is re-checked as the market moves rather than set once.