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DESIGNING NEW FINANCIAL 
INSTRUMENTS 
UNIT 5 – STRATEGIC FINANCING
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
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
ENVIRONMENTAL FACTORS 
• Price Volatility 
• Globalization of markets 
• Tax asymmetries 
• Technological advances 
• Regulatory changes 
• Increased competition 
• Cost of information 
• Cost of transacting
INTRA-FIRM FACTORS 
• Liquidity needs 
• Risk aversion 
• Agency costs 
• Quantitative sophistication & Mgt training 
• Accounting benefits
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.
NEW PRODUCT DEVELOPMENT 
PHASE 1 •DIRECTON 
PHASE 2 •DESIGN 
PHASE 3 •TESTING 
PHASE 4 •INTRODUCTION
PHASE 1: DIRECTION 
STEP1: FORMULATION OF NPD 
OBJECTIVES & STRATEGIES 
STEP 2: IDEA GENERATION 
STEP 3: IDEA SCREENING
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
PHASE 3: TESTING 
STEP 12: PRODUCT TESTING 
AND PILOT RUN 
STEP 13: TEST MARKETING
PHASE 4: INTRODUCTION 
FULL SCALE LAUNCH 
• STEP 14 
POST LAUNCH REVIEW 
• STEP 15

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CF_9 NPD

  • 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