What topics are important to analyse a financial product?

Question

When reading analysis papers of financial product, derivative or stock, tangible or not, I noticed that a lot of those papers seem to have similar structures.\n\nThis got me to the question if there exists some sort a basis structure to use when analysing a financial product. Or if there are some important topics we need to take in account, to have our analysis accepted by the Financial and Economic communities?\n\n***Please note that I'm referring to research/analysis that focuses on the financial product.***\n\n***Edit - 2015/05/29:*** As commented: I'm interested in doing a theoretical analysis of, for example, a derivative that someone invented, this won't have any historical data.\nAlso, what is analysed when a central bank receives a proposal for a new product (i.e. new type of derivative)? What type of analysis is done? It's more in this sense, analysing a new formulation of a financial product that isn't on the market yet. How is this done?

Answer 1

Central Banks typically aren't consulted about the creation of new products. If a client is looking for a new type of structure they would approach the structuring desk of a bank. An example might be a call option on the S+P which can only be exercised if there is more than 6 inches of snow in Central Park at noon on New Years day. This would be a fairly cheap option as there usually isn't 6 inches of snow in Central Park on New Years day. Another example may be a put on the S+P 500 which only becomes live (knocks in) if at some point the yield on the 10 year treasury drops below 2.5%

There won't be any historical data on this particular structure but we can look at distributions and correlations to simulte how such a structure might have performed in the past.

Hope this helps