The profitability index is used to calculate the profit potential of a certain investment that enables an individual to determine whether to push through with the said investment or not. This value reflects the difference between the initial investment and the stream of future cash flows discounted at present value. The index can be easily derived by dividing the present value of the project by its cost. An attractive investment is usually one with a profitability index that is larger than one, and this factor usually serves as a basis for which a project is either accepted or rejected. The utilization of the profitability index usually assists individuals as they are equipped with the capacity to determine the relative measure of desirability of a given project. However, this presents problems due to the fact that the use of a relative measure often results in ignorance of scale.

The Accounting Measures of Return is a capital budgeting technique that enables one to determine the profitability of an investment. The Average Rate of Return is utilized to create a comparison among multiple projects and derive the expected rate of return for each one. It can be computed by dividing the per-year average accounting earnings after depreciation and taxes by the average book value. However, problems arise due to the fact that it uses accounting numbers, which are usually deemed irrelevant to the cash flows. These numbers may be easily manipulated, and they do not reflect the prices in a market place. To put things simply, in the utilization of this measure for project valuation, the accounting earnings must be calculated for the future and this must be compared with the resulting estimate with some “hurdle” accounting rate of return.

Efficient Markets Hypothesis is a hypothesis that states that share prices reflect all information and that consistent alpha generation is impossible. In accordance with the EMH, stocks always trade at their fair value on exchanges, and this deems investors incapable of ever purchasing undervalued stocks or selling stocks at inflated prices. The prices in financial markets are expected to provide a reflection of unbiased beliefs about the future. The accuracy of these beliefs are often based on the available information, but it must be ensured that it is never systematically biased. Systematic biases will be used to make profits above those justified by the risk of strategy.

The Internal Rate of Return refers to a method utilized to determine the profitability of a given investment. It is a discount rate that makes the Net Present Value of all cash flows equate to zero in a discounted cash flow analysis. This method is instrumental due to the fact that it is a relative measure that paves way for easy comparison with the IRR of other investment projects. The decision rule with regards to investment projects is that the IRR should be higher than some given interest rate. However the use of the IRR poses concerns due to the fact that it is a solution to a polynomial equation. It is more difficult to solve and must be done numerically.

The government often offers and issues fixed-income securities to the public as a means to fund its operations. These securities fall under three categories: treasury bills, treasury notes and treasury bonds. Due to the fact that they are asserted by the government, these securities offer a high degree of safety and stability. However, they often connote a minimal return. The three categories of government debt differ in terms of maturity and interest payment. Treasury bills are often characterized by short-term debts that ascertain the receipt of cash flows within one year and are known to be risk free due to the absence of doubt with regards to future payments. Treasury bonds, on the other hand, refer to long-term government debt with annual payments and a repayment of face value at the designated date of maturity that is often beyond a period of 20 years. Treasury bonds, however, do not possess the same “risk-free” characteristic due to the fact that they do not disable uncertainties with regards to future cash flows because inflation must be factored in due to the length of the period a treasury bond is often held.

Corporate Equity refers to the claims of owners on the assets of a given entity after deducting all the liabilities. Equity securities are of great relevance due to their absolute return potential and capacity to affect the risk and return characteristics of portfolios. However, it is important to truly understand the risk and return dynamics of these securities due to the fact they are often connoted as risky securities, stemming from the fact that their value is derived from the performance of an entity’s operations and its corresponding profitability. This is reflected through the means of dividend distribution. Despite the high degree of risk associated with the securities, holding equity has its own share of advantages due to the fact that on average, a higher return has been observed relative to holding government debt. Equity securities derive their value based on an entity’s profits in contrast to derivatives who obtain their respective values based on the fluctuations in the value of an underlying security.

The Derivatives market is a medium of exchange for contracts between two or more parties that derived its value from the fluctuations in prices of the pre-agreed underlying financial asset. It is often. The market can be divided into two: the exchange traded market and the over-the-counter market. Due to this fact, the largest financial markets are often defined by those that involve a high-level volume of activity stemming from derivatives. The payoff of a certain derivative is often associated with risk due to the fact that they are dependent on the price of some other security or even on the prices of real goods. An example of a derivative market is a futures market that is characterized by the trading of contracts wherein one can fixate the price today for the future delivery of one good. On the other hand, the options market, another example of a derivative market is the options market, wherein one can fixate a price today for a future contingent delivery of some good. This gives emphasis on the term “contingent” due to the fact that options contracts merely give an owner the right but not the obligation to accept the offer.

In determining the value of the firm, one must subscribe to the principle of value additivity that states that the price of a basket of financial contracts is equal to the sum of the prices of each individual contract times the quantities. The claims of the creditors with regards to the assets of an entity should equate to the value of the firm in adherence to the value additivity and the no arbitrage principles. The value of the firm, if put simply, mainly refers to the price in which one is given the capacity to sell future cash flows that the assets of the firm generate for the purpose of paying back traditional creditors. The value of the firm cannot necessarily be deemed equal to the price of the assets of the company. One must exert due care and diligence in coming up with the value because it must be taken into consideration that there are cash flows that are associated with third parties such as taxes, and fees to lawyers and accountants and also due to the fact that it may be more advantageous to sustain the company rather than to sell it due to the possibility of reducing future tax payments. Lastly, the value of the firm almost never equals the book value of the firm’s assets

Determining the forms of EMH is highly reliant on the information available, and has thus been categorized into three. The Weak Form EMH sets out the assumption that the information embodied in the prices available are hugely based upon past information, and is incapable of influencing information that is yet to be made publicly available in the market. The Semi-Strong Form EMH suggests that prices reflect all publicly available information, which factors in past information as a subset. The incorporation of past information is required in order to have a basis from which it can be assumed that prices quickly adjust to new information that is made available. Lastly, the Strong Form EMH states that all information is taken into consideration in the representation of prices. Regardless of whether the information is historical or current, or whether it is made available to the public or is confidential, the assumption is that all information surrounding the investment is factored into the price. With regards to this, it can be inferred that the EMH makes the assumption that not even insider information can have the capacity of providing investors with an edge that will allow them to constantly generate returns that perform beyond the overall market average.

In Singapore, disclosures of short sell orders for specified capital markets products to the approved exchange and as well as reports on the short positions in specified capital markets products are requirements that are expected to be fulfilled. A person who places a short sell order on an approved exchange is bound to the corresponding responsibility to report it to an approved exchange on or before the time of the short sell order. The obligation to report to an approved exchange may be passed on to a third party, who must be informed of the short sell order so that he/she may be equipped to take on the duty of reporting the said order to an approved exchange. In the case of doubt, the obligation to report the short sell order rests with the one who places it. However, when the person has already discharged his obligation of informing a third party of a short sell order, the legal responsibility of disclosing the short sell order to an approved exchange is passed on to the third party.

The definition of securities market and futures market embody the phrase “whether electronic or otherwise” which implies that all market operators, notwithstanding the means through which they operate, brick and mortar trading floors and fully electronic trading platforms alike, are made to comply with the same regulations. However, the correlation does not apply vice versa. Despite the fact that an electronic facility is established, this does not necessarily imply that the facility is operating as a securities or futures market. If it functions merely as a conduit or a channel of communication to the market, without exhibiting other attributes of a market, the facility shall fall short of the definition of securities or futures market. An example of which is an electronic order-router operated by a licensed intermediary serving merely to route orders. This does not constitute a market and is therefore not subject under the regulatory regime.

Capital markets have increasingly grown to surpass borders. In accordance to this, Section 339 of the SFA (Extra-Territoriality) establishes the circumstances wherein a particular act conducted in part or as a whole outside the Singaporean territory reflects a violation on any provision of the SFA. It further provides that In case an operator of an overseas market falls within the ambit of section 339(1) or (2) of the SFA, it will be subject to comply with Part II of the SFA and the operator of the overseas market is expected to apply to MAS for approval as an approved exchange or recognition as a RMO. An investor in Singapore is deemed to possess direct access to a market if the investor can purchase or sell futures contracts or securities on the market without the intervention of an overseas intermediary. Direct control is not recognized if orders are merely forwarded to another intermediary in the jurisdiction.

Recognized Market Operators have an established regulatory regime that serves as a risk-based approach facilitated by the MAS towards market operators, highlighting the requirements necessary to respond to the inherent risks posed by the market. These regulatory requirements have carefully been established in order to substantially address and take into consideration the risk profile, nature and scope of the functions of the proposed market operations. In addition to this, the MAS is given the powers to subject the RMOs to additional obligations depending on the various functions undertaken by the market. The guidance further states that an applicant not conducting market operations of systemic importance may be given the capacity to elect to be regulated as an approved exchange if he/she is deemed qualified in terms of meeting the statutory obligations imposed on actual approved exchanges.

The main concern of the MAS is the ability to secure the regulatory objectives that have been drafted under the guidance. In the case that these objectives may still be obtained in the absence of the regulation of a certain corporation, the said entity may be immediately approved or exempted from having to be regulated as an approved exchange or RMO. The MAS takes notice of the fact that operations conducted may grow and develop in size and complexity over time, and thus it has reserved the power to withdraw exemption in the case that the growth and development poses concerns to the regulatory objectives set out. Furthermore, if the change in circumstances and the introduction of new activities are revealed to pose more significant risks, the EMO becomes required to obtain regulation either as an approved exchange or RMO.

Foreign exchange swap transactions generally seek the involvement of the same name on both maturity dates. However, transactions under two different names must be permitted unless otherwise stated. Market participants are expected to specify the price being dealt in order to mitigate the risks of confusion that may arise due to differences between local and overseas terminologies. In the dealing of amounts, market participants are discouraged from challenging the amounts. Once the key phrases, ““Your amount”, “All yours” or “All mine” are spoken, the participant is deemed committed to honoring the counterparty’s full mount. If the price of the price quoter is concurrently dealt by a couple or more brokers, the price quoter is expected to honor, subject to limit, the minimum amount dealt with each broker. After dealing on a price, a market participant is expected to specify his amount and the price quoter must accordingly state the amount he is honoring. In the event that a market participant seals the deal for an amount exceeding the minimum dealing amount, and the broker is capacitated to honor the full amount, the market participant must not insist that the whole amount be in one deal but should agree on the splitting of amounts done in an appropriate manner.

Despite the fact that a foreign exchange swap transaction usually maintains the involvement of the same name on both maturity dates, transactions under two different names must be permitted unless otherwise stated. In order to avoid confusion regarding the prices to be dealt, market participants must ensure that it is clearly specified. Foreign exchange swaps are required to have a process of rate setting that is governed by this guidance. It dictates that the setting of the spot rate in a foreign exchange swap transaction must take place as soon as a price is hit and prior to the clearance of the counterparty’s name. The power to set this spot rate in the foreign exchange swap transaction rests in the hands of the price quoter. Following this, an appropriate amount of time shall be given for the clearance of the counterparty’s name. Furthermore, if there is a substantial delay in the receipt of a reply, the awaiting end is given the alternative of inquiring through a broker with regards to the outcome. In case it is evident that there is still no definite answer, he/she is permitted to cancel the deal.

The guidance governing the settlement and fixing of NDFs dictates that the differences between the contracted forward exchange rate and the prevailing spot exchange rate on the date of valuation must be settled in terms of settlement price that is usually in USD on the maturity date. The fixing conventions and reference rates utilized are unique to the different NDF currencies. Due to this fact, market participants are required to be familiar with the specific convention prior to engaging in transactions. In case of doubt, they are expected to obtain clarification. In the case that reference rate may not be accessed as specified, market participants must utilize the fallback mechanism set out in the NDF contract to determine the rate. The SFEMC makes available for publication standard template terms for NDFs for certain Asian currencies. The Template Terms are reviewed and updated periodically and Market Participants should familiarize themselves with the Template Terms accordingly.

The guidance on money market dealing practices cover the policies on name disclosure. It is important to secure the name of the borrower and to withhold its disclosure until the broker has significant reason to believe that the potential lender is committed to doing business at the quoted price. The key question “who pays” signifies a lender’s commitment to do business at a price quoted, subject to credit approval. If the name of the borrower provided by the broker is deemed unacceptable by the lender, especially when it is a borrower taking on the offer of a lender, the borrower may question the lender’s existence at the price quoted by the borrower. It is important that the broker obtains the approval of the lender with regards to his/her name’s disclosure to the borrower. The lender is, likewise, encouraged to provide the necessary permission. However, in the event that the lender disagrees, the broker may turn to the secretary of the SFEMC for assistance in facilitating the verification of the authenticity of the price quoted and give notice to the borrower with regards to the outcome of the process.

The chapter on OTC derivatives dealing practices set out the guidelines with regards to direct transactions involving interest swaps, non-deliverable swaps, cross-currency swaps, forward rate agreements, currency options and interest rate options and as well as transactions entered into by means of brokers. Market participants are expected to give notice to the broker in case of a deal where less than the minimum dealing amount is involved. In addition, in case a market participant may not deal with another market participant on the grounds of credit limit, the broker must be immediately informed during the early stages of negotiation. With regards to settlement of differences, a broker is unable to substantiate his quotation and a difference is due to its principal, the broker must close the IRS, NDS, CCS, or FRA deal at the next available price. Any differences may be settled by means of sending a cheque to the principal, dictating the details of the deal. Market participants are not given the capacity to insist for the deal to be contracted at the original rate, but should expect the receipt of a cheque for the purpose of settling the difference. In the absence of any contrary guidance, the differences are to be paid on spot date.

Finance embodies the study on valuation and risk management. Having this said it is important for those studying finance to understand the components of risk, pertaining to the time of its revelation and the nature of its randomness. Although these issues are difficult to assess, it is easier to safeguard the risks associated with timing, as an individual may take into consideration the valuation and management of risk free cash flows at various points in time to acquire an overview on the said issue. The issue with regards to its randomness, however, is more complicated because it is difficult to distinguish risky cash flows among different classes and categories.

An annuity reflects an asset that provides periodic uniform cash outflows over a specified number of years. This concept assists in the computation of the present value of future cash flows in which the ability to determine how much is required to be invested in the present in order to obtain a specific amount in the future can be secured.

Accounting numbers, governed by the standards and modes of valuation practiced and utilized by accountants are deemed irrelevant to an entity unless the transaction affects tax computations and reduction of tax payments. Accountants are thus tagged harmful to the financial health of a company due to the fact that their foundation with regards to the determination of values and earnings differ from those embodied in finance.

The involvement of an accountant significantly affects the computation of the NPV of a project through depreciation. The basis of measuring tax payments is often the accounting profits derived from an investment. In order to reduce the tax due, the investment may be depreciated. This is often referred to as the depreciation tax shield that may be offset against positive profits.

Sunk costs refer to cash outflows previously made that are deemed irrelevant in the computation of the NPV. These costs are no longer considered when assessing the attractiveness of a certain investment. However, the acknowledgement of opportunity costs, or the value forgone in not choosing a particular alternative, is relevant in the process of pursuing a particular investment.

Transactions in a secondary market differ those of a primary market’s in that securities are traded in a secondary market post-issuance. Relatively speaking, volume and value in a secondary market are small. However, they are deemed relevant as they provide essential services such as hedging, intertemporal matching of liquidity needs and price signals to the primary market. On the other hand, securities that are initially issued through the means of auctions to the general public or through their enlistment in the IPO refer to primary market offerings.

An options market provides a medium of exchange for options contracts in which a holder is given the capacity and the right to the sale or purchase of an underlying commodity on an open market. It is a market in which one is enabled to enter into an agreement regarding the pre-determined price of a good for its contingent delivery at a specified date in the future.

The Net Present Value is relevant in determining the value of the investment project. It is referred to as the difference between the present value of cash flows and corresponding outflows required in order to generate the said cash flows. If a positive net present value is derived, this connotes that the investment project is valuable; that a stream of cash flows may be acquired at a cost that is lower than the market.

Axioms are defined as postulates that are generally accepted to embody truth and are known to provide a breeding ground for further discussion and arguments. There are multiple relevant points in which modern corporate finance can be broken down in order to have a better understanding of the greater picture. This includes the fact that most financial markets are defined as the typical competitive market of the economists wherein market participants are expected to take prices as given. It also includes the principle of value additivity and the no arbitrage assumptions that are highly interrelated, with value additivity referring to how the prices of a group financial contracts is equal to the sum of individual contracts multiplied with their quantities, and with the no arbitrage assumptions, or the fact that it is impossible to conduct the sale of a portfolio which has zero payoff for a positive price for certain at all times in the future. Lastly, the efficient markets hypothesis tells us that prices in financial markets will at all times provide a reflection of unbiased beliefs about the future. These axioms embody profound ideas that are relevant in the study of corporate finance.

Care and due diligence is required in the treatment of inflation. A straightforward approach must be utilized in conceptually dealing with the effects of inflation on the accounts. Consistency must be applied; in that when nominal cash flows are to be determined, discounting must be done uniformly using the fixed interest rates that apply to the cash flows presented in nominal terms. On the other hand, when adjusting cash flows for inflation, real interest rates must be used. It is common for people to compute using the nominal rate and merely factoring in inflation by deducting it from the said rate, but this is not necessarily correct.

The application of value additivity entails that the value of the assets is equivalent to the sum of the values of the components. To put it simply, the price of a basket of financial contracts must always equate to the sum of the prices of the individual contracts multiplied by their quantities.This highly correlates to the no arbitrage assumption, because despite being different principles, the violation of value additivity translates to a corresponding violation of the arbitrage assumption.