Trading - delay cost (CFA online q)

CFA Level III Portfolio Management
#1

Although focused on long-term value, North Circle Advisors will exploit temporary mispricings to open positions. For example, portfolio manager Bill Bradley pegged LIM Corporation’s fair value per share at $28 yesterday; however, LIM’s stock price seems to have overreacted to a competitor announcement prior to market open today. The follow events unfold over the course of the morning:

  • PRIOR CLOSE: LIM closed at $30.05
  • PRE-MARKET: LIM priced at $20.34
  • MARKET OPEN: LIM opens at $22.15
  • 10:00 AM: LIM trading at $23.01
  • 10:00 AM: Bradley confirms the overreaction with target price of $28
  • 10:05 AM: Bradley instructs trader to buy 25,000 shares, with a limit price of $28 when LIM is trading at $23.09
  • 10:22 AM: Trader finishes the buy with an average purchase price of $23.45

What is the delay cost?
Delay cost = (Σs j) (p 0 − pd)
Answer: Delay cost = (∑sj)p0 − (∑sj)pd=(25,000×23.09)−(25,000×23.01)=$2,000
Why is p0 23.09, and pd 23.01??

Thank you!

#2

Delay cost is the difference between the arrival price and decision price. Po is arrival price and is essentially the price of the security when the order to buy or sell the specific security has hit the market (this case $23.09) the decision price (Pd) is essentially the price at which the PM decides “lets buy or sell the stock” … in this case the decision price is $23.01 because when the PM saw tht price he then made the decision to go ahead with the trade. Hope this helps