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Question of the Week - April 12th 2016

What is the expected cost to buy a basket of an index?

 

Chart 1: ACE Cost Curves for MSCI Emerging, MSCI Pacific, S&P 500, and MSCI World Indices 

 

  • We wanted to study the effect of increased order size on transaction costs, specifically to see how much it would cost to trade into a position of an index. The cost curves represent expected costs at simulated position sizes.
  • The above chart shows costs for nine baskets of four different indices, starting at $25 million with positions increasing by a factor of 0.5.
  • Not surprisingly, trading a basket of MSCI Emerging is more expensive than the other indices we looked at. The expected cost to trade a $25 million basket of MSCI Emerging is 13.2 bps.This cost goes up to 19.6 bps for a basket of $125 million.
  • A $125 million basket of each index represents the following order sizes: MSCI Emerging - 1.8% MDV; MSCI Pacific - 1.0% MDV; SP500 – 0.2% MDV; MSCI World – 0.1%MDV.

 

Expected costs were calculated using Discretionary ACE with an optimal 0.3 strategy with an as of date of 1/4/2016.

 

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