In the Kaplan blue box example for IS, it uses the cancelation price to calculate the terminal value of the paper portfolio. While calculating the terminal value of the REAL portfolio , it still uses the cancelation price. Why is that? I thought for the real portfolio gain or loss, we need to use the execution price, right?
Cancelation price is terminal price. There may be few EP.
Good to know! But since the terminal price may not be what we get for the real portfolio, which this case is the cancelation price, why that is important to the real portfolio? Shouldn’t we use the EP for that since this is what we get eventually?
Look, I’m trying to use one rule of thumb. So far it was helpful in IS calculating.
Example. Investor decided to buy 1000 stocks for price x (the best price). By passage of time, price was changing several times and he filled an order partially. Finally he canceled the order at non-acceptable price.
So, I’m calculating gain on paper portfolio as the difference between the best scenario price and the worst scenario price with no transaction charges.
The gain on real portfolio I calculate as (#real no of shares executed times price executed + transaction charges) - (#real no of shares executed times cancelation price)
total IS equals (gain on paper - gain on real) / gain on paper
I like your way to remember with best scenario price and worst scenario price. Thanks for the help!