Day 1: At market close, CMS shares are priced at $75.
Day 2: Before the market opens, Reynolds decides to buy 8,000 shares at $74 per
share by placing a limit order that will expire at the end of day 2. The limit
order does not fill and the CMS shares close at $75.75. After the market
closes, the company announces it has entered into a joint venture which will
expand its international presence. Reynolds assumes the news could move
the stock up or down no more than 1 point.
Day 3: Reynolds submits a new limit order to buy 8,000 shares of CMS at a price
of $77. As the trading nears day end, 4,000 shares fill at $77 per share plus
$1,500 in commission. CMS shares close at $79 and the remaining portion
of the trade is canceled.
A. Calculate the total dollar amount of implementation shortfall for the CMS
transactions. Show your work.
Using the Implementation Shortfall method as:
IS = paper return - actual return = (79 - 75) x 8000 - ((79-77) x4000 -1500) = 25,500
My question is: why do we consider 75 as being the decision price?
(paper return = total number of shares in the order x (current price - decision price) )
Thank you!
