Implementation Shortfall - realized gain/loss

I don’t understand this part of the equation. The realized gain/loss is the difference between the execution price and the relevant decision price.

In the example in reading 29, page 25, shares close at 10.05 on Tuesday. On Wednesday the shares are 10.07 and the PM buys 700 out of 1000. It closes at 10.08.

Realized gain/loss is calculated as 10.07 - 10.05. Why is it not 10.08 - 10.07? A gain/loss is not on opportunities missed but on the price changes when the PM is holding the shares (and eventually sells them to be realized). Is it not?

This IS topic seems so easy but the wording makes it complicated (decision price?). I probably would not know how to calculate the parts of IS if the question states that the PM buys shares over two days.

Decision price is the first price you take when you decide to place a trade. This is the actual loss you made. The delay cost is the benchmark (new decision price) minus the original decision price. The realized loss thereafter is the execution on that, minus the new benchmark.

All in all, they need to be compared to the first price, just broken down into subcategories. So it’s all really execution price - first price * % shares, and replace with closing price for % cancelled.

Can someone walk me through Q11b in R29? I understand commissions and opportunity cost but delay cost and realized profit/loss is such a pain.

For example:

Monday Benchmark is $10. 600/1000 are purchased for $10.02. I thought it was (10.02 - 10.00) / 10.00 but apparently there is no delay ($0). (10.02 - 10.00) to me, makes more sense as delayed cost rather than realized gain since you are delaying purchasing and the price movement causes you to lose out on the gains.

Also, delay = closing price - benchmark price. Does the benchmark price change or is it always the price on the first day you decide to trade?

Break down the trades and it will be easier.

Here you have 3 trades, the first one at 10.02, the second at 10.08, and the third cancelled at 10.05.

Cost of first is 10.02 - 10.00 (this is the decision, or first price) * %shares which is 60% here

Cost of second is 10.08 - 10 * 10%, which can be further broken down to delay cost and new execution cost, delay is new benchmark - old, and execution is the 10.08 - 9.99

Cost of third, 10.05 (cancellation price) - 10 * 10%

Pretty easy if you understand what it means. It’s all price traded - price desired, that’s the extra money you pay (or forego for cancellations) than you initially wanted.

The best way to do this is to draw a time line!

Mon Tues Wed

Open $10 $10.2

Close $10.20 $10.3

Purchase 500 Purchase 200 Did not execute 300

Do it that way! Draw the same timeline everytime!