Basis risk arises from standardization of futures contract for amount and expiry date.

Since futures contract can be bought or sold only in multiples of 200,000 notional, any amount that needs to be hedged but is not a multiple of contract amount leaves a mismatch between exposure amount and hedged amount.

Second, the futures contract expires on the last business day of contract month. If the exposure to be hedged has maturity of some other day in the month, there will be mismatch in the maturity.

A 'Normal' shape of term structure implies that - Longer the term, the higher is the rate.

A 'Flat' shape implies that rate is the same for all terms.

Change in portfolio market value = Portfolio market value × Portfolio MD × Change in YTM

=  ( 1000000 x 5.80 ) x .01%  =  580

As the YTM has fallen, the bond prices will rise.

So 10,000,00 + 580  =  Rs. 10,00,580

Swap and Forwards are traded only in OTC market.

Futures are traded on an Exchange.

Contract Amount (or Market Lot) is the minimum and multiple of trade size. It is Rs 200,000 of face value for both T Bills and Govt. Bonds futures.

If you buy a sovereign zero-coupon bond and hold it till maturity, you face no market risk (since you don’t sell early), no reinvestment risk (no coupons to reinvest), and no credit risk (Sovereign - Government default risk is negligible).

The economic role of derivatives is risk management.

In contrast, the economic role of underlying markets is financing and consumption.