Calculation of Implementation Shortfall

CFA Level III Portfolio Management
#1

Hi guys,

I am confused with the calculation of realized profil/loss and the delay costs, regarding the relevant decision price and relevant benchmark price. For the following scenario, what would be the decision price, relevan benchmark price for the purchase of the securities?

Day 1 - Securities A closed at $20 per shares;

Day 2 - Before Market opens, the dealer placed an order for 1000 shares at $20.05 but the order is unfilled. The share was priced at 20.1 when market closed.

Day 3 - Before market opens, the dealer agains placed the same order but at 20.15, however, the order were unfilled again and raised to 20.3.

Day 4 - Dealer placed an order with 20.5 for 1000 shares, 500 shares were filled in and the market closed at 20.6. The remaining 500 shares were cancelled.

The execution cost is $20. What is the realized profits / lost, delay cost, missed opportunity cost and implementation shortfall?

Thanks.

#2

Benchmark 20

Decision (closing price from the day before your order was filled) = 20.3

rp/l =(20.5-2.3)/20*1/2=0.5%

delay=(20.3-20)/20*1/2=0.75%

missed=(20.6-20)/20*1/2=1.5%

comission=20/(20*1000)=0.1%

For implementation shortfall just add these numbers

2.85%

If you want just implementation shortfall:

20*1000=20000

20.6*1000=20600

Profit =600

20.5*500 +20=10270

20.6*500=10300

profit 30

600-30=570

570/20000=2.85%

#3

Nicely done.

#4

So for delay you always use 20? That is the same benchmark For missed and delay?. For missed you are using 1/2 of unrealised portion and for delay other half realised. Also why p/l r is 20.5-20.3 and not 20.6-20.5?

#5

  1. benchmark is always the same

  2. yes for missed you use unrealized portion, for delay and p/l realized portion

  3. for pl/l formula is (execution price-decision price)/benchmark*portion realized

#6

Re 3 if it is a decision price then it should be 20,because this the price when he decided to buy security or it has to be previous?

#7

Decision (closing price from the day before your order was filled) = 20.3

#8

Cheers might finally got it. Well explained!