Robert Paulson, CFA has just finished a trade in his portfolio for a purchse of PSSC (Paper Street Soap Co.). The trade took several days to complete and Robert wanted to calculate how much the trading process cost through the use of an implementation shortfall calculation. The original trade was put on for 1000 shares with a limit price of $30.00 right after the close on Moday when the stock closed at $30.05. No shares were purchased on Tuesday and the closing price ended at $30.25. Robert revised his limit before Wednesday’s open to $30.30 and 900 shares were purchased at that price with commissions of $25. At the end of the day the stock closes at $30.50 and Robert cancelled the remaining trade.
A. Identify & Describe the different parts of implementation shortfall (2 minutes)
B. Calculate each part of the implementation shortfall strategy and Determine what the total Implimentation shortfall for this trade is. (10 Minutes)
C. List 4 advantages and 2 disadvantages to using an implimentation shortfall strategy. (6 Minutes)
I saw that CPK, I think it’s because you din’t use the denominator anywhere - even your paper portfolio return. your answer was the actual $ loss, not the percent.
If you take your answer of .295 and divide it by 30.05 you get ~.0098. I think as Jana mentioned you also had some decimal places off. I bet it would count for partial credit though.
Value of the paper portfolio at time 0: 30.05*1000=30,050 Value changed of the paper portfolio: (30.50-30.05)*1000=450 Value changed of the traded shares: (30.50-30.30)*900-25=155
Implementation cost = (the gain of paper portfolio - the gain of traded shares)/(papaer portfolio at time 0) = (450-155)/(30.05*1000) = 0.009817 = 98.17 bps
I almost duplicate what jana did. …I’ll practice this kind of questions until it’s very hard to make mistakes and finish fast. One sanity test: % = (/)*(shares/shares)
@cpk - even though your answer was totally wrong (confusing $'s and bps, come on now son…), the labeling and organization made me think you knew exactly what you were talking about. Wonder how much handwriting, organization, and labeling affect the graders? FTW!
Also, why do they call it realized P&L - seems like just another delay cost to me…
Realized gain/loss may include the market impact… as for the delay, I agree with you. Since it doesn’t tell when the orders are executed during the day, it may use implementation shortfall strategy – purchasing early in the morning.
Realized p/l tries to measure the market impact , while delay measures the cost of inactivity or waiting for the trade to come to you . Slightly different attitudes to each
Realized P/L (or) Market Impact = Change in Transaction Price due to impact of trade.
Delay = Manager induced (maybe lethargy, trying to game the system … waiting for a buy order to come to his bid, or a sell order to come up to his ask … which would make a measure like Effective Spread very good - since it would be negative) - but would be caught by the IS Method, correctly.
The trade has a market impact, but it may be less than Realized Profit/Loss. The price change from decision price is caused by the trade and market movement.
I can’t find a method to calculate the market impact of a trade, which is also a part of the market. The market impact may also depend on the size & emergency of the trade.
…I’ll practice this kind of questions until it’s very hard to make mistakes and finish fast. One sanity test: % = (