Are Securities Also Derivatives英文文献资料.docVIP

American Journal of Operations Research, 2012, 2, 430-441 /10.4236/ajor.2012.23051 Published Online September 2012 (http://www.SciRP.org/journal/ajor) Are Securities Also Derivatives? Kuoping Chang Department of Quantitative Finance, National Tsing Hua University, Hsinchu, Taiwan Email: kpchang@.tw Received May 21, 2012; revised June 20, 2012; accepted July 8, 2012 ABSTRACT This paper has used the Arbitrage Theorem (Gordan Theorem) to show that first, all securities are derivatives for each other, and they are priced by the same risk neutral probability measure. Second, after the firm changes its debt-equity ratio, the equityholders can always combine the new equity with other existing securities to create a home-made equity which will give exactly the same time-1 payoff of the old equity. That is, we have a capital structure irrelevancy propo- sition: changes in firms’ debt-equity ratios will not affect equityholders’ wealth (welfare), and equityholders’ prefer- ences toward variance are irrelevant. Third, when the firm moves from a more certain project to a more uncertain one, the time-0 price of equity will increase, but (because the time-1 payoff of common bond has an upper bound) the time-0 price of common bond will decrease. Fourth, different labor contractual arrangements will not affect the time-0 price of labor input. When the firm moves from a more certain project to a more uncertain one, the time-0 price of labor input will increase if it is under the share or the mixed contract. Keywords: Arbitrage Theorem; Derivatives; Home-Made Security; Capital Structure Irrelevancy; Share and Mixed Labor Contracts 1. Introduction Section 2 derives the Arbitrage Theorem and uses the theorem and several examples to show that securities are derivatives for each other; and that after the firm changes its debt-equity ratio, the equityholders can always com- bine the new equity with other existing securities to cre- ate a home