A strategy's gross edge must pay for the trades and capital needed to capture it. High turnover, expensive shorts or leverage can turn an accurate forecast into a loss. This lesson fills in the cost and carrying terms of the holdings-and-cash ledger, with explicit units and conventions so that costs are neither omitted nor counted twice.
Learning objectives. By the end of this note you should be able to:
- separate explicit fees, spread, impact, financing and borrow;
- calculate costs from traded notional and holding-period exposures;
- distinguish cash proceeds from unrestricted funding;
- implement borrow constraints as a feasibility condition;
- report break-even costs and adverse cost scenarios.
In this lesson
- Charge trading and holding separately
- A transparent execution-cost calculation
- Financing cash and borrowing securities
- Feasibility before profitability
- Combine costs without hiding units
- Break-even and adverse scenarios
Before you start
The full lesson, with worked examples and exercise solutions, is for members.
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