Frank's SS10 3Q Vignette

Hans Frank, a German investor, belives because of the recent decline in the US dollar, there are many good short term investment opportunities in the US. So Frank decides to buy 1000 shares of Zade American Basketballs (ZAB) at $30 per share. At the time, the exchange rate was 1.30/€. The company pays an annual dividend of .30 per share, which Frank receives just before selling his shares. When Frank sold the shares of ZAB at $33.00, eh was diappointed to find that the US dollar had continued to deteriorate against the euro. He closed his currency position at $1.326/€. The US witholds taxes on dividends paid at a 10% tax rate and it has a treaty with Germany to avoid double taxation. The treaty allows citizens to take a tax credit for any taxes paid/witheld in the other country. Assume Frank has a 40% income tax rate and a 25% capital gains tax rate. Teh capital gains tax applies to all capital gains, without consideration of the holding period. On the day Frank sold his shares of ZAB, eh made the decision at 3pm March 8 Frankfurt local time, based on the current price of 32.50. Frank's trader was on break when he placed the order. By the time the trader returned, a large institutional American pension plan had started to build a poisition in ZAB and in the process bid up the price by .50. As a result, Rank’s shares were sold for 33.00. Although Frank was impressed by the performance of his trade, he is concerned about adverse consequences of execution costs on the performance of future trades and is considering alternatives to direct investment in international equities. Frank's strategic goal is to maximize diversification within the countries he invests. However, from a tactical perspective, Frank wants to ensure that he can liquidate any position quickly to take advantage of intra day price movements. 1. Frank's after-tax return is closest to a. 9.76% b. 8.82% c. 6.47% 2. Which of the following execution cost components best describes the .50 price increase from Frank’s standpoint? a. Commissions b. Opportunity Cost c. Market Impact Cost 3. Given Frank’s investement goals and strategy, which of the following alternatives to direct investment in the equities of US based companies is most appropriate? a. Closed end funds that buy stocks of US based companies and trade on German exchanges b. ADRs trading on US exchanges and representing shares of US based companies c. ETFs that mimic a US based index, like the S&P 500

C C 3rd one my first instinct was to go for ADR but he’s german, wouldn’t he want GDR’s (or whatever is on his home turf? a us based co. on a us exchange would just be trading a US stock… no ADR necessary? so that sounds weird to me. ETF’s are liquid, so that sounds fine to me, also wants diversification so an index sounds good. yeah, i’ll go C C’s all the way around!

Q1. C – I am messing up my calculations here and getting 6.8529% Q2. This one is C - Market impact? Q3. C – ETF’s (as maximize diversification tracking S&P, ETF just works like a stock and can be traded anytime, unlike Closed ended funds.)

i got 30k/1.3 = 23,076.92308 divi was $300, convert at time of sale rate 300/1.326 = 26.244344 x .6 (taxed, don’t worry about the 10% part b/c you’d get it back as a credit) = 135.746606 sell px 33k/1.326 = 24,886.87783 so i did 24,886.87783 - 23,076.92308 = 1809.95745 x .75 (for the tax) = 1,357.468088 profit + 135.746606 = 1,493.214694 / 23,07.92308 = .064706% for once, my answer tied to an answer they had. this best be right.

ohh… Thanks banni got my mistake. I deducted taxes on the US side by 0.90 (10% tax), then converedt US to EURO by dividing by 1.326, and once getting the EURO DIV number, again multiplied that number by 1.10 factor (i.e showing a 10% tAX back in form of credit). So that little differential and lucky to have got it right here.

nice banni on #1 - you’re spot on 1. c 2. b 3. c these are video questions so in his words the answer #2: Not a market impact because if Frank puts a sale order in, once that order goes to the market, the selling might push the stock down, but that hasn’t happened as we know it. This was an opportunity cost - it was luck that the trader wasnt there, other people are doing things in the market and it is just fortuitous that as a seller, with other things the price went up. Opportunity cost could easily be positive or negative.


Ok I put 2B, then I said if I am right, you guys owed me a dollar. Then I deleted it because I was unsure again. phil’s explanation makes sense. Think of market impact cost as this: You are a big deal and selling a million shares on an illiquid company. By selling the shares you rip through the higher bid orders in the order book to the lower priced bids since you are offering to sell too large of a block of shares. This is the “market impact” cost. Schweser is brutal at explaining this in the book.

do you read the CFAI text Aliman?

I did for the whole first section of equity phil. I think there is a lot of detail that Schweser misses, but as for whether it gets tested in detail, I’m not sure. I read the Porter section in the CFAI book; it’s much more detailed and great to read it from the man himself. Also, sometimes when I read Schweser, I’ll put my CFAI book propped up in front of me and scan quickly for any differences. I’ll try to look at the blue-background examples in CFAI as well as I go along. What about yourself?

I print out those LOS’s and cross off each one while reading the CFAI text, and take notes to each LOS. It takes forever. I switch to Stalla if it is going too slow but for the most part read CFAI - which is why I think yall are doing laps around me.

market impact cost makes sense as a concept and i can see why it’s not a great answer. but opportunity cost? i feel like that’s equally if not a worse answer here. opp cost is you consciously saying I’ll do A not B, and the lost opportunity $$ from not choosing B. you go and put in a sell order and some d-bag who just got his series 7 drop the ball and holds your order for a half hour… that’s opportunity cost? huh? i’m not buying it yet, although i’ll buy that market impact is not a good answer.

ps- aliman, you can have your dollar, but you’re going to have to work for it. i have it folded the long way. dance, brother, dance.

So opportunity cost is the “intangible cost associated with the delay or failure to complete an individual trade” So the best example I can think of is the time you have to wait before putting in an order, say with your online broker, and the time it takes for the broker to acknowledge that order and send it to the floor. During that time, bids and asks can change in highly liquid stocks and you might not get attractive pricing (especially true for day traders and deep-in-the-money or out-of-the-money calls/puts where every penny counts).


crap! what a way to end an already very shitty day -> 1/3. Gonna take it light tomorrow! Enjoy!

is that really a definition for opp cost? if so, i stand corrected and thank you for clarifying. you google that or is that in the CFAI books? i never really thought of it in that context at all. i now have the TV on. my studying is going downhill and fast.

as for tomorrow, i think i’m going to run a 5k in davis sq at 11am and then i might hit up southie for the parade and festivities. buddy down there is having a big party, should be fun. so i’ll be exercising my body and then my liver, but not my brain. it’s boston, i have to play… it’s just what people do here.

The definition is in Schweser; it’s not really intuitive, but you can think of “opportunity cost” as the best alternative of sitting around and waiting for execution, which is actually having the transaction executed (yes, I know, it’s dumb). I applied it to that time I called my broker and yelled at him on the phone for poor execution and hurting my calls on a position I had. He actually reimbursed me for the difference and said that they were totally at fault (best customer service ever). However, I no longer trade options :wink:

I have never succeeded in not going out on a Saturday. Hopefully I can pull through tonight and keep going . . . hopefully some people will still be grinding out on here as well? :wink: