The 24th Frontier Forum for Digital Technology and Finance

Managing a bankruptcy protection 

Application with the aid of Parasian 

or Parisian options

Speaker: Professor Song-Ping Zhu

University of Wollongong, Australia   

Moderator: Associate Professor Sun Xianming        

School of Finance, Zhongnan University of Economics and Law

Date: Monday, December 4, 2023

Time: 10:00 AM - 11:30 AM

Venue: Room 106, South Building of Wenquan Hall

Lecture Abstract

With Evergrande's recent bankruptcy protection application in the US, my research in the area of pricing Parisian and Parasian options over the past 10 years may help more companies to understand how to properly manage a bankruptcy protection application with an opt-out option.

With only one character difference between the two words Parisian and Parasian, pricing an American-style Parasian option is drastically different from pricing its former counterpart. In this talk, I shall demonstrate how we have overcome, through an integral equation approach, the major difficulty of numerically solving a pair of coupled three-dimensional (3-D) PDE systems instead of a 2-D PDE system coupled with another 3-D one (for Parisian options) with the existence of a moving boundary that has fully nonlinearized the entire PDE systems. Utilizing the computed optimal exercise price, we are able to quantitatively discuss how much earlier an American-style up-and-out Parasian option should be exercised thanits Parisian counterpart with a change of the accumulativeness of the so-called tracking clock time, which measures the risk of a contract being potentially knocked out, as well as the financial insights in terms of the nonlinear interactions between the holder's American-style early exerciseright and the effect of the knock-out barrier. Of course, our approach can be easily extended to pricing other American-style Parasian options with different barrier feature.

In the context of bankruptcy protection, this means that a company may get out its bankruptcy protection period earlier than it would have otherwise believed!