Practical Applications of Forgive, or Award Your Debtor? A Barrier Option Approach

Practical Applications Summary

In Forgive, or Award Your Debtor? A Barrier Option Approach, published in the Fall 2018 issue of The Journal of Derivatives, authors David Sun, an associate professor at Kainan University in Taoyuan City, Taiwan, and Chun-Da Chen, an associate professor at Lamar University in Beaumont, Texas, assess the best approach for creditors to take in anticipation of a sovereign debt crisis. The authors conclude that the best course is usually debt forgiveness, rather than some sort of “repayment award, ” or an implicit promise of favorable terms from the capital markets in the future.

TOPICS: Counterparty risk, fixed income and structured finance, credit risk management, global