Can someone please explain the logic behind the delay costs calculation ? Realized profit / loss seems intuitive but I cannot figure it for delay costs. I am refering to the end of chapter problem 11 B, reading 41, SS 14. I am not able to think through the illustration in the text either. Any help is greatly appreciated ! Thanks.
It is the opportunity cost of not having traded today. Say you were planning to buy today and you did not for whatever reason (e.g. because you placed a limit order higher than day’s highest bid). If the price of the stock went up the next day, you basically left some money on the table because you now have to buy at a higher price. There are two key points (1) delay cost can be positive or negative (2) it is no longer a delay cost if you end up canceling the order. In that case, the lost profits due to canceled portion will be attributed to the missed opportunity cost.
Thanks so much CFAAtlanta. Intitally I struggled but I went over the text example with your explanation and the calculation makes total sense now. Thank you!