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A simple quant problem from Russian Wall Street. What sign does vodka's duration have?Y.

positive

Come on, you have to back up your answer. Why do you think it's positive?

Negative. As interest rates go up, the affordability of credit goes down which, in turn, leads to depression and an increase in vodka consumption, so the price goes up. Alternatively, as the state tightens its grip on the economy, inflation goes up - see above. Bud'te zdorovy ( to your health )!

but if the interest rates go down, economy will expand, incomes will rise, more parties will be held and so the demand for vodka will increase causing an increase in the price, what do you think about that?Siberian

Alright, ready for the right answer? To determine the duration you can just take the derivative of asset's present value with respect to interest rate percentage. Vodka's duration turns to be negative, because as you increase the percentage, the value of the asset increases. Enjoy! ))

QuoteOriginally posted by: YaakovAlright, ready for the right answer? To determine the duration you can just take the derivative of asset's present value with respect to interest rate percentage. Vodka's duration turns to be negative, because as you increase the percentage, the value of the asset increases. Enjoy! ))Is this special to vodka?

I believe you add some ale to wine, brandy, or whiskey it'd screw the whole thing together with the price ))

I would disagree with this reasoning. Your base assumption is that vodka generates fixed future cash flows to the holder which are then discounted. This isn't really a case with vodka. Truth be told, I don't think it has a duration (in dTV/dr sense). We might compute a statistical sensitivity to rate, but that wouldn't be a duration proper, more of a beta to rates. About the only duration argument I can come up with is via today's consumption of vodka leading to negative future cash flows by the way of suboptimal reasoning due to inebriation. That would be a positive duration.

You are trying to move the wrong percentage. Try moving the alcohol percentage instead of interest rate percentage.

Tried that, but alas without much success. Increasing the percentage leads to optical bifurcation in the results... and everything else.