The question has 2 subquestions. I read through the answer but could not figure out why in question A, they use Bid price for benchmark while using mid-point for answering Question B.
My 2nd problem is how to realize that they are asking about $$$ or % when: “estimate the total implementation shortfall” .
I often do both for more prudence!
Anyone has the same concerns?
Thanks!
Bid Price was not used as benchmark. The closing price of 52.87 was used as the benchmark for the part A) as required by the question.
For Part B) Benchmark Price for Implementation Shortfall = Mid Price of the Bid-Ask (53.25) when Order was placed.
As regards your other question - can you do one without doing the other? Get % without working out $$$ first?
Thanks for the reply! A. So which word in the question indicates the question require using that price (bid price) for benchmark intead of midpoint? As for my 2nd question, sometime the answer is only $$$. I meant if we should just do so for not wasting time. (i.e. no need step of %) Thank you!
For Part A)
A. Estimate the total transaction cost of the sale of 30,000 shares if the closing price is used as the price benchmark.
And always Benchmark Price - Execution Price = Transaction Cost (for a Sale)
For a purchase it would be [Execution Price - Benchmark Price.].
Why the midprice was used for B ?
Yes, why do they come up with the midprice to determine the answer to B? I haven’t seen the midprice being used for the computations in the reading.