Seems like an awful lot of equations to remember when you actually break it down (ie. explicit costs, realized profit/loss, delay costs, and missed trade opportunity). The obvious answer is “know everything” and “why leave it to chance” but for the amount of information associated with this seemingly innocent LOS, it had better be worth a lot of points if they’re going to test us on this. What do you guys think? can u actually see them giving us a full example and have us calculate the individual components to implementation shortfall? Would be easy if it was just calculation IS alone.
odds are they will ask us to either calculate the entire shortfall (in which case we don’t need to do the individual components) OR they will as us to calculate one of the componenets without doing them all… odds are. But i don’t guarentee it.
Comparing to the amount of equation we have to remember in LII, number of equation in LIII is cake…come on, three more won’t kill you.
WS - can you write out these three…i keep trying to wrap my head around this concept and its frustrating me to no end…
ws - i suppose you’re right…don’t you find there’s just way more information in level 3 though? information overload…i actually breathe a sigh of relief when i see calculations for interest rate swaps/caps/floors etc. i’m just not liking this “yesterday’s closing price” vs. “benchmark price” bla bla bla urg
Striker, I am right there with you. I can’t really express those in words…let me try… Delay cost=(Execution-time price minus decision price)/decision price X (filled share/total desired shares) Realized profit/loss(I remember as market impact cost) = (Executed price minus execution-time price)/decision price X (fill share/total desire shares) Opportuniy cost= (later-on price minus decision price)/decision price X (unfilled share/total desired shares) I must agree, this is the most confusing part in LIII, if I make a mistake there, I sincerely apolopy…however, this is the best way I can put it.
jmychasi Wrote: ------------------------------------------------------- > ws - i suppose you’re right…don’t you find > there’s just way more information in level 3 > though? > > information overload…i actually breathe a sigh > of relief when i see calculations for interest > rate swaps/caps/floors etc. > > i’m just not liking this “yesterday’s closing > price” vs. “benchmark price” bla bla bla > > urg Heck yeah…I get more “excited” with calcuation (except for IPS) than writing out IPS and doing comparing and contrast.
let me try to explain 1) you decide to buy a stock today, decision price is P0, you put a limit order below P0 and don’t get filled, the stock closes at P1 2) next day you put a market order and get partially filled at P2 (lets assume, you order had a market impact such as P2>P1), and the end of the day stock closes at P3 3) you don’t try to fill the remainder of your order Based on this scenario P2 - P1 (i.e. your market impact) will be the realized profit/loss portion of the implementation shortfall realized profit/loss = [(P2 - P1) / P0] * (order filled / total order) P1 - P0 will be delay cost portion of the implementation shortfall (think of it this way if P1>P0, the difference is an amount you missed out on because your order wasn’t filled at P1; if P1 this can be thought of as holding period cost, i.e (execution price - decision price) / decision price P3 - P0 will be missed opportunity cost of the implementation shortfall (if P3>P0, then this amount is you hypothetical lost fornot participating; if P3
relized profit/loss - is it the name CFAI gives, i thought it is something else
Realized P/L is how its stated in Stalla I know that, for CFAI I dont know, but its the same as Market Impact Cost…
CSK, realized profit/loss is the name that CFAI gives, however, I found that if I use the name “market impact cost”, it helps me understand the concept better.
volkovv your explanation is great. Who has done CFAI reading 41 question 11 Can you explain me the logic in this calculations. They have two benchmark prices
strikershank Wrote: ------------------------------------------------------- > odds are they will ask us to either calculate the > entire shortfall (in which case we don’t need to > do the individual components) OR they will as us > to calculate one of the componenets without doing > them all… > > odds are. But i don’t guarentee it. Check out the 2005 exam. They had an entire set on it (with detailed component breakdown)
Can anyone point me to the 2005 question on this concept? I saw the question in 2006 not 2005?
Sure Grexan, its in the 2005 AM Exam online.
mo34 Wrote: ------------------------------------------------------- > strikershank Wrote: > -------------------------------------------------- > ----- > > odds are they will ask us to either calculate > the > > entire shortfall (in which case we don’t need > to > > do the individual components) OR they will as > us > > to calculate one of the componenets without > doing > > them all… > > > > odds are. But i don’t guarentee it. > > > Check out the 2005 exam. They had an entire set on > it (with detailed component breakdown) My opinion is that the LOSs don’t say explicitly that you need to calculate the components, but it does say that you have to calculate imp. short. and “evaluate” trade in terms of implicit costs. I’ll probably focus on the components if I can get them to make sense conceptually so that I don’t have to memorize. If I’m just memorizing, I’ll probably take a chance and just blow it off.