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Rakhi Vasavada
Rakhi Vasavada, Financial Advisor
Category: Finance
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Experience:  Attorney and Financial Expert. Have specialization in Financial Laws.Practice experience of over 13 years
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On a particular date a fund manager wanted to raise £3350,

Customer Question

On a particular date a fund manager wanted to raise £3350, so he sold 2536.534 units @ £1.3207 each.
3 months later, he used £2000 of this money to repurchase units in the same fund. At a purchase price of £1.2341 each, he got 1620.574 units. (The selling price of the units at this time was £1.1914 each)
If he had, in the first instance, raised £1350 with no need to repurchase units 3 months later, has his action produced an overall gain or loss to the account and what is the calculation?
Submitted: 2 years ago.
Category: Finance
Expert:  Rakhi Vasavada replied 2 years ago.
Dear Friend,

Hello and welcome. Thank you for providing an opportunity to assist you.

I believe he has created a gain. Let me try and explain.

1. He sells 2536.534 units at 1.3207 each. He raises 3350 as required.

2. Now, if he buys back 1620.574 units at price of 1.2341 each, he has made a gain of (1.3207 - 1.2341 = 0.0866) Per Unit while purchasing back.

If there was a need to repurchase or not is a different issue. But if at all he has repurchased, it has resulted in gain of 0.0866, resulting into more number of units repurchased than sold in the same amount. At the selling price of 1.3207, if he had bought back, he would have been able to repurchase 2000/1.3207=1514.3585 units.

As agains this, with the same amount he repurchased 1620.574. Therefore, he has produced a gain of 1620.574-1514.358 = nearly 106.226 Units OR Pound 0.0866 per unit.

I am sure this would help.

You may please leave a positive rating if this helps as this is the only way we are compensated for assisting you. Alternatively, you may revert back with a reply if you need further assistance or if I have missed out on any aspect of your question.

Warm Regards
Customer: replied 2 years ago.

For Rakhi Vasavada.............................


I am about to study your answer but meantime, can you explain what you mean by "If there was a need to repurchase or not is a different issue."


Thanks.

Expert:  Rakhi Vasavada replied 2 years ago.
Dear Geoff,

Let me be more clear. I am sorry if I created any confusion.

When I say if there was a need to repurchase or not is a different issue......... I mean that we are not going into the merit that the fund manager should have repurchased OR should NOT have repurchased. We are not debating his decision to repurchase.

However, if at all he has repurchased, he has realized gains as explained above.

I am sure this would help.

You may please leave a positive rating if this helps as this is the only way we are compensated for assisting you. Alternatively, you may revert back with a reply if you need further assistance or if I have missed out on any aspect of your question.

Warm Regards
Customer: replied 2 years ago.

For Rakhi Vasavada.


Hi,


I understand that the merit of the the repurchase is not being considered, however the effect of the initial oversale was the subject of my original question. Let me try and clarify this.


….. if £1350 had been raised initially and not the £3350, what would have been the outcome compared to what he actually did? (Let’s say that the account manager didn’t need all of the £3350 – he only needed £1350. He realised 3 months later that he had made an error by overselling too many units, so he used the £2000, from the oversell, to repurchase units.) If he had not oversold in the first place there would have been no repurchase later.


I have looked at your previous answer and comment as follows:-


1. Agreed starting point.


2. Here he uses £2000 to buy back units @ £1.2341 and receives 1620.574 units. There can’t be a gain because £2000 was part of the sum initially raised and the same £2000 is now being spent. What you could say is that the value of the 1620.574 units is less than the £2000 cost of purchasing them. This is because the selling price is less than the buying price on the same day. Buying price was £1.2341; Selling price was £1.1914. This means that the 1620.574 units which cost £2000 to buy, were worth 1620.574 x 1.1914 = £1930.75 on the same day.


Clearly, as a result of the decline of the unit prices between the two dates, the £2000 used to repurchase units at a price lower than the initial selling price will return more units. This means


£2000 @ 1.3207 = 1514.348 units in the original deal and


£2000 @ 1.2341 = 1620.614 units in the later deal.


The fund gains 106.266 units as you have said.


The problem with this is that these units were, on the day they were bought, actually worth less than they cost to buy.


The question remains - If units had not been initially oversold, would this have been better or worse, in cash terms, than what he actually did?


 

Expert:  Rakhi Vasavada replied 2 years ago.
Dear Geoff,

Thank you for your detailed reply.

I read your reply carefully and after another thought, I would still keep my original opinion. I understand what you trying to convey.

What my school of though it even if the units he repurchased where pounds 1930.75 on the same day is little important. I have a reason for this. What counts is the "actual" value he sold and the "Actual" value he purchased it back. i.e. the executed price and NOT the quoted price.

My judgment would still remain the same that he realized a very little gain as I explained above.

Now coming to overselling issue. Let us presume, just for sake of argument that he oversold and realized more money that what he actually required. Even if he did this, he might have made a very little profit to none, but he has CERTAINLY not realized any loss for you.

Even if we say that selling more units was his error of judgment, this has not inflicted any loss on you. This is because he has managed to "actually" buy back the same at little lower price.

Hope this makes sense.

You may please leave a positive rating if this helps as this is the only way we are compensated for assisting you. Alternatively, you may revert back with a reply if you need further assistance or if I have missed out on any aspect of your question.

Warm Regards
Customer: replied 2 years ago.

For Rahki Vasavada........


Hi.


I have studied your last answer and suggest the following.


What if he had not sold any units in the first instance?


We know that the selling price of those units was 1.3207 each on the initial date. We also know that the value of the whole fund on this date is calculated using this selling price.


In a declining market, say 3 months later, the seliing price of each unit has reduced to 1.194. Of course, this reduces the total value of the fund.


Logically it follows that if you sold 1000 units on the first date you would make 1320, whereas if you sold 1000 units 3 months later you would only get 1194. Therefore, as one would expect, selling one’s shares or units in a declining market will loose money. The difference in the fund values on the two dates will quantify the loss.


In a bull market, with rising prices, the same action will result in a gain or profit. These are the market forces which determine values of all equity-based investments.


Surely, this is the same logic to be applied to my question and the comparative values are crucial.


In the first instance he sold units which he did not need to. On that date those units had a known value. 3 months later, all of the units in the fund were worth less than they were previously because of the bear market. Yes, he got more units for the same money but the fact is that their total value was less than it had been 3 months earlier.


It stands to reason therefore that if he had done nothing, the fund would still have lost value overall in the period due to the bear market but, because of his intervention, the fund lost more.


To me, this is logical. Can you dispute it and counter with alternative logic?


 

Expert:  Rakhi Vasavada replied 2 years ago.
Dear Geoff,

Hello and welocme again. Let me explain my logic.

First of all when you say what if he would not have sold any units at all ? This, in my opinion would be highly subjective as I have no information as to why and under what circumstances did he sell. Also, I do not know what was his requirement was that initiated the sell. I would not be able to comment on this.

Then comes the quantity of sale. Yes, I agree that he should have properly estimated the exact requirement and should have sold only that much number of units.

Now, my logic is that even if he oversold, he has not inflicted any losses. The logic behind this the acutal "executed" trade price. Presume he sold nearly 1700 units more than required. But prices declined marginally after he sold. He repurchased the same units back at prices LOWER the the original sale price.

In a way, he protected the value that much by selling it and purchasing it later at lower prices.

The logic is that if he had not sold them at all, the overall value too would have declined.

So, my very confident opinion is that --- yes -- I agree that he should have properly calculated the requirement and sold only that much number of units. BUT in my opinion, he has certainly NOT inflicted any loss. On the contrary he has marginally protected the value by purchasing it back at lower price.

This is beneficial in falling markets. On the contrary, if he has oversold units and the markets are rising, he would have been forced to buy it back at higher price.

This is not the case here -- so being pretty sure, I am of the opinion that no loss has been inflicted on you.

Hope this makes sense.

You may please leave a positive rating if this helps as this is the only way we are compensated for assisting you. Alternatively, you may revert back with a reply if you need further assistance or if I have missed out on any aspect of your question.

Warm Regards

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