Birkan Capital's book is 20% net long Indian banks and 10% net short IT services. Run a stress scenario in which the rupee falls 8% and rates rise 100 basis points, using bank sensitivities of minus 1.5% per 10 basis points and IT sensitivities of plus 0.8% per 1% rupee fall. What does the book lose and which hedge helps most?

The book loses about 3.64% of NAV, Rs 182 crore, and both legs lose together. Rates up 100 basis points take banks down 15%, costing 3.0%; the rupee's 8% fall lifts IT 6.4%, and the IT short loses 0.64%. The rates leg is 82% of the damage, so a rates hedge, paying fixed on interest rate swaps, helps most while keeping the bank stock picks.

Exposure times sensitivity times shock, for each leg. Banks: 100 basis points at minus 1.5% per 10 is a 15% fall, on 20% of NAV that is minus 3.0%. IT: an 8% rupee fall at plus 0.8% per 1% is a 6.4% rise, on a 10% short that is minus 0.64%. In rupees that is Rs 150 crore and Rs 32 crore, Rs 182 crore in all. A stress testA calculation of what a portfolio would lose in one specified bad scenario, using its sensitivities to each shock, rather than a statistical average. is only this arithmetic, done before the day rather than after it.

Think of a household with a salary in rupees and a loan in dollars, and a second earner whose bonus is cut when rates rise. On an ordinary day the two incomes look unrelated; in a currency crisis both go wrong at once. Birkan's two legs look like diversifiers, but a falling rupee and rising rates arrive together, and that single event hurts the bank long and the IT short at the same time. The scenario is coherent, which is what makes it worth running: central banks do raise rates to defend a falling currency.

Hedge the biggest line with the instrument that matches its driver. The bank leg loses Rs 150 crore for 100 basis points, Rs 1.5 crore per basis point; paying fixed on interest rate swaps with an assumed Rs 4.5 lakh of sensitivity per basis point per Rs 100 crore needs about Rs 3,333 crore of notional. That removes 3.0 of the 3.64 points and keeps every bank stock. The IT leg's rupee risk can be offset by buying about Rs 400 crore of dollars forward. A short in the bank index would also cut the loss, but it would throw away the stock picking that is the reason for the bank position.

Plenty, and the answer should say so. Banks have their own rupee exposure through foreign borrowing, IT valuations fall when rates rise, and sensitivities estimated from calm years understate moves in a crisis. A stress is a lower bound built from assumptions, so the useful output is not the 3.64% but the discovery that the book's two largest bets share a single driver. Close with a decision: put a rates hedge on the bank leg sized to the stress, and set a limit on combined loss in this scenario so the book cannot drift back into it.