Implementation Shortfall - Sale Transaction

CFA Level III
#1

Day 1: At the close of the market, XYZ shares are priced at $40. The portfolio manager decides to sell 5,000 shares at $41 per share and places a limit order that will expire at the end of the next day.

Day 2: No shares are sold and the stock closes at $39.50

Day 3: Before the opening, the portfolio manager submits a new 1-day limit order to sell 5,000 shares of XYZ at price of $39.60. As the trading day winds down, 4,000 shares fill at $39.70 plus $75 comission. XYZ shares close at 39 and the order was cancelled.

Calculate each component of implementation shortfall as a percentage.

Can anyone solve this and explain their solution?

#2

the brave one here …perhaps one among the most difficult topcs in the curriculum. I’d try to allocate the costs across the implementation shortfall components and notably :

Base would be 40 (closing price at the decision taken) X 5,000 = $ 200,000

Explicit costs : $ 75 commissions —> 75/200,000 = 0.0004 or 0.04%

Realized loss : (39.7 - 40.0) x 4,000 = 1,200. I apply 40 which is the closing price post decision (not sure though) = 0.6%;

Opportunity costs : (39 - 40) x 1,000 = $1,000 which means 0.5%

Realized loss probably includes some delay costs as well. Sorry if I haven’t been so helpful but that’s how i’d approach this issue

#3

Realized Costs are based on adjusted Decision Price of $39.50:

(39.70 - 39.50) x 4,000 = $800 or 0.4% (gain)

Delay Costs : (39.50 - 40) x 4,000 = -$2,000 or -1% (loss)

I used this summary for IS:

http://www.analystforum.com/forums/cfa-forums/cfa-level-iii-forum/91341464

#4

Thanks for the answers sunseeker and jpsi1, jpsi1 very useful link thank you for this, I think this answers my question.

I think where I was stumbling was the adjusted decision price. Thank you both :]

#5

Reasonable split up Jpsi1. Reasonable split up.

thanks indeed for your input