Implementation Shortfall question, otherwise, 2011

mik82

1.) Objective of implementation shortfall is to minimize the costs of trading, both implicit and explicit. Although explicit costs are easy to judge ex-ante, many implicit costs must be judged ex-post, however strategies have been created to attempt to predict and minimize total costs ex-ante. Implementation shortfall is this trading strategy.
2.) Whereas VWAP, TWAP and simple logic break orders up throughout the day when the price is favorable to the benchmark, the benchmark price in implementation shortfall is set at the decision time. Implementation shortfall thus trades early in the day and generally uses limit orders to minimize price uncertainty to the benchmark price, whereas VWAP and TWAP and simple logic trade equally through the day or at times that the stock is trading < benchmark.
3.) You would use this trading strategy on orders that have a high priority and there is sufficient volume in the early portion of the day that allow a large order to be placed close the decision price.

All three questions seem exactly the same. Good thing is I have yet to see a CFAi question like this.



Edited 1 time(s). Last edit at Sunday, May 15, 2011 at 10:41AM by Paraguay.

yuoska

Take a shot at this as Essay question:

Implementation Shortfall is an approach to *measure* trading costs and components.
1) Why is it also considered a "trading strategy"?
2) What do you do in this trading strategy differently than you'd do otherwise?
3) When do you use this trading strategy?



Edited 1 time(s). Last edit at Sunday, May 15, 2011 at 10:29AM by jbaphna.

zwjy

Agreed, kind of a wide-open response question....EOCs try to do this, but hope not the exam.

Anyone care to answer or proceed to grade Paraguay?

Unforseen

jbaphna Wrote:
-------------------------------------------------------
> Agreed, kind of a wide-open response
> question....EOCs try to do this, but hope not the
> exam.
>
> Anyone care to answer or proceed to grade
> Paraguay?


Eleventy.

wake2000

Eleventy it is.

Thanks

Windjammer

Paraguay Wrote:
-------------------------------------------------------

>
> All three questions seem exactly the same. Good
> thing is I have yet to see a CFAi question like
> this.


Paraguay, thanks for the clear explanation, but I want to reply to your statement in your last sentence. There is actually a question that discusses these strategies, see 2010 mock exam, morning session.