Can somebody give me a English definition of Reazlied Profit/Loss Cost, Delay Cost, Missed Trade Opportunity Cost. Please!! Thanks!!
You have to consider a simple scenario. Imagine you identified a stock you want to buy. Price at the time you identified the stock is the original or Benchmark price. That’s the price you’re going to use to calculate the paper portfolio return. (say $100 /share) Now you enter a limit order to buy at $98 and you wait… Nothing happens until market closes (actually the stock starts moving away from you )so you decide to trade at market first thing in the morning tomorrow. The closing price now is your decision price, say $101 ( because that’s when you decided you had enough I guess ) The difference between the decision price and the original price is used to calculate the Delay cost (obviously). Now the next day you enter a market order and your order is filled at $102, that’s the execution price. Now the difference between the Execution price and the close on the previous day reflects the impact of your order on the market price and is used to calculate the Market Impact cost ( or Realized p/l). Adjust all these for the number of shares and add the opportunity cost for the shares you never ended up trading and the commissions, bla bla . .and you get your total implementation cost.
very simply consider 3 closing prices… 20 21 22.5 20- when u made the decision to trade …buy…(100 shares) 21- when your order was not fulfilled 22.5 - when say 80 share order was filled. 20 expired…the share was bought @ 20$ if you were to calculate loss on something… u’ll take the final price vis-a-vis the initial price (20) loss on trade not executed :- -> missed trade opp cost- the loss due to unfilled order = 22.5-20/20 * 20/100 loss on trade executed :- the trade price (22) vis-a-vis the initial price (20) … but you break it up into two parts… (22-21) and (21-20) ->realized loss = 22-21/20 * 80/100 (market impact cost) -> delay cost = 21-20/20 * 80/100 (the cost of letting the order go unfilled) 20 is your base price i.e your decision price… your benchmark… it can be the closing price on the day prior to your decision to trade… or can be the midqoute at the time of decision.
bips Wrote: ------------------------------------------------------- > very simply consider 3 closing prices… > > 20 21 22.5 > > 20- when u made the decision to trade …buy…(100 > shares) > 21- when your order was not fulfilled > 22.5 - when say 80 share order was filled. 20 > expired…the share was bought @ 20$ > > if you were to calculate loss on something… u’ll > take the final price vis-a-vis the initial price > (20) > > loss on trade not executed :- > -> missed trade opp cost- the loss due to unfilled > order = 22.5-20/20 * 20/100 > > loss on trade executed :- > the trade price (22) vis-a-vis the initial price > (20) … but you break it up into two parts… > (22-21) and (21-20) > > ->realized loss = 22-21/20 * 80/100 (market > impact cost) > -> delay cost = 21-20/20 * 80/100 (the cost > of letting the order go unfilled) > > 20 is your base price i.e your decision price… > your benchmark… it can be the closing price on > the day prior to your decision to trade… or can > be the midqoute at the time of decision. One comment. The decision price can be different from the benchmark price.
are you sure ?.. i don’t have my books with me but i’m pretty certain i read that the benchmark price you choose is called the decision price/ arrival price…
I am not sure if you have access to Schweser, but if you do check out problem P235 book 4. There is one Benchmark price ( the original decision to trade the stock) and two or three decision prices ( each time the trader makes the decision to change his limit/market order creates a decision price)
I did this part from the CFAI. haven’t done the questions yet. i’ll go through it. thanks.
Thanks guys! The reason I wanted an English definition instead of a number example is that Schweser use “perfect” example. However, there was a CFAI question about implementation cost, those price point was interday points. That totally threw me off, I didn’t know what price to use. Opportunity cost is easy===>it is the cost of not filling your order. For the rest of two, I can’t come up an definition that I can use in any situation (ie, interday, 2 trading days, 3 trading days) Thanks
opportunity costs (not executing at all) and delay costs (delaying the order) are easy… but what i find most dodgy is ‘realized loss’ … or the market impact cost - diff between the realised price and the price that would have prevailed had the order not been executed… are we assuming here that every order no matter how small will impact market price ? … collectively all the orders - of course… but individually???.
On the 2000 exam they had a really simple version of implementation costs…