Delay cost calculation in Implementation Shortfall

CFA Level III
#1

How is the Delay/Slippage cost really calculated ?

The curriculum says : ‘‘Delay costs (slippage), reflecting the change in price (close-to-close price movement) over the day an order is placed when the order is not executed that day; the calculation is based on the amount of the order actually filled subsequently.’’

But in reading 35, EOC question 11, the answer key shows the Delay Cost to be calculated as (Previous Day’s Closing Price - Benchmark Price)

#2

Yes, the benchmark keeps changing after each day that the order doesnt fill.

#3

That’s what I thought but in that problem the benchmark doesn’t change.

#4

The original decision (benchmark) price doesn’t change; the revised decision price changes.

The numerator is the revised decision price (previous day’s close) minus original decision (benchmark) price. The denominator is the original decision (benchmark) price.

#5

thanks!

#6

My pleasure.

I need to write an article on implementation shortfall. I wrote a nice AM session mock exam question on it, so I can expand on that pretty easily.

#7

I find mocks out there to be either trying to mimic the exam or overly hard and trying to help the student learn.

Are your mocks meant to mimic the exam or are they more for the student to learn and better prepare for the exam?

#8

I try to mimic the exam.

#9

Nice, I will try it… MM right?

Is it ready or soon to be?

#10

Mark said that they (4 of 'em) should be ready within a couple of weeks.

#11

Sweet!

I’ve got the 2008-2018 CFAI AM, 2 from Canadian Daren, a few from IFT, will get 4 from Mark (& u), and a few others…

That should be enough to pass this thing???

#12

I should think so.

When did the 2018 CFA AM exam come out?

#13

I find determining the Implementation Shortfall (I/S) easier, initially, by doing the following steps first:

Step 1: Calculate the ‘Paper Portfolio Gain’:

  • BVPAPER PORTFOLIO = Total Shares x Original Decision Price (usually first price given)
  • EVPAPER PORTFOLIO = Total Shares x Ending Price (usually last price given)
  • GAINPAPER PORTFOLIO

Step 2: Calculate the ‘Real Portfolio Gain’, including commissions:

  • BVREAL PORTFOLIO = Actual Shares Traded x Execution or Transaction Price + COMMISSION ($)
  • EVREAL PORTFOLIO = Actual Shares Traded x Ending Price (usually last price given)
  • GAINREAL PORTFOLIO

Step 3: Step 1 - Step 2 = Implementation Shortfall (in $):

  • GAINPAPER PORTFOLIO - GAINREAL PORTFOLIO = Implementation Shortfall ($)

What’s confusing is determining the Delay Cost, in my opinion. Generally, I use the mnemonic 'R.E.D.O’

Apart from going chronologically to determine what’s the R(ealized Cost), E(xplicit Cost), D(elay Cost), and the O(pportunity Cost), does anyone have any good tips on solving for I/S on a per share or bps of total cost perspective?

#14

Stupid me: I already wrote such an article.