1. DESIGNING NEW FINANCIAL
INSTRUMENTS
UNIT 5 – STRATEGIC FINANCING

2. FINANCIAL ENGINEERING
• Financial Engineering involves the design,
development and implementation of
innovative financial instruments & processes
and the formulation of creative solutions to
problems in finance.
• 2 key words – INNOVATION and CREATIVITY

3. FINANCIAL ENGINEERING
NEW PRODUCT
• SWAP
• MORTGAGE-BACKED SECURITIES
• ZERO COUPON BOND
• JUNK BOND
REPACKAGE OLD
IDEA
• EXTENSION OF FUTURES TRADING TO NEW COMMODITIES /
FINANCIAL INSTRUMENTS
• SWAP VARIANT
• ULIPS
COMBO OF
PRODUCTS &
PROCESSES
• Online sale of ULIPs
• White ATMs

4. ENVIRONMENTAL FACTORS
• Price Volatility
• Globalization of markets
• Tax asymmetries
• Technological advances
• Regulatory changes
• Increased competition
• Cost of information
• Cost of transacting

5. INTRA-FIRM FACTORS
• Liquidity needs
• Risk aversion
• Agency costs
• Quantitative sophistication & Mgt training
• Accounting benefits

6. INNOVATIVE PRODUCTS
OF LAST 2 DECADES
Municipal bond fund, Equity access accounts,
debit cards, tuition futures, variable rate
mortgages, zero coupon bonds, extendible
notes, Euro-notes, Dual currency bonds, Gold
loans, warrants, convertibles, Master Ltd.
Partnership, Electronic fund transfer, stock-for-debt
swap, Project finance/lease, MMMF, NOW
a/cs, Bitcoins, IRA/Keogh a/cs, mortgage pass-throughs,
currency swaps, paired common
stock, ATMs, ULIP, in-substance defeasance,
synthetic convertible bond.

7. NEW PRODUCT DEVELOPMENT
PHASE 1 •DIRECTON
PHASE 2 •DESIGN
PHASE 3 •TESTING
PHASE 4 •INTRODUCTION

8. PHASE 1: DIRECTION
STEP1: FORMULATION OF NPD
OBJECTIVES & STRATEGIES
STEP 2: IDEA GENERATION
STEP 3: IDEA SCREENING

9. PHASE 2: DESIGN
STEP 4: CONCEPT DEVELOPMENT
STEP 5: CONCEPT TESTING
STEP 6: BUSINESS ANALYSIS
STEP 7: AUTHORIZATION
STEP 8: PRODUCT DESIGN & TESTING
STEP 9: DELIVERY PROCESS & SYSTEM
STEP 10: MARKETING PROGRAM
STEP 11: PESONNEL TRAINING

10. PHASE 3: TESTING
STEP 12: PRODUCT TESTING
AND PILOT RUN
STEP 13: TEST MARKETING

11. PHASE 4: INTRODUCTION
FULL SCALE LAUNCH
• STEP 14
POST LAUNCH REVIEW
• STEP 15