All,
Does Effective Spread should account for explicit costs? (such as comissions, taxes, etc)?
I dont’ think so.
Why are you still studying?
Cause I’m not taking the tests just for the charter, I want to learn.
I understand but going home to keep studying right after the test…?
I don’t see any violations above. Do you?
I do not.
Go down a few threads, maybe about 15. All information you want is there. The page number in curriculum with examples.
The key to this is you have to calculate the effective spread using the execution prices for the trade but the midpoint is calculated using the bid-ask spread at the time of order entry. If you use the bid-ask spread that existed at the time of execution you may or may not get a different mid quote to be used in the effective spread calculation.
It should not account for explicit costs.
The example in the book uses the mid-quote at time of execution. I’ll let you infer what I think will probably happen based on that.
No it doesn’t.
The blue box in the book and 2017 PM Mock beg to differ. Again, believe whatever makes you feel good but that’s just my 4 cents.
The book is very clear. Very clear. If looking for descrepencies makes you feel good then so be it.
I still can’t seem to find the thread you were referring to googs1484.
Just so we can close this topic, does effective spread include or not explicit costs?
Reading 29 Section 2.2.1 in CFAI curriculum.
The effective spread is two times the deviation of the actual execution price from the midpoint of the market quote at the time an order is entered. (If parts of the order execute at different prices, the weighted-average execution price is used in computing the deviation from the midpoint.) The quoted spread is the simplest measure of round-trip transaction costs for an average-size order. The effective spread is a better representation of the true cost of a round-trip transaction because it captures both price improvement (i.e., execution within the quoted spread at a price such that the trader is benefited) and the tendency for larger orders to move prices (market impact).
So, in short, we do not take into account explicit costs?
The spread is by it very nature an implicit cost : that is to say is dependent on the market a the time of the trade. Explicit costs are cost not dependent on the market at the time of the trade (ex transaction cost, tax cost…)
Correct, we don’t/ Thats only implementation shortfall.
Great. Now look at the blue box (example 1). And look at the 2017 PM Mock exam. The last two show a different method. Will be invalidated 100%.