Real Options In Non-performing Assets Disposal Decision

Since China established four Financial Assets Management Companies in1999, ourcountry has constantly increased the disposal of bad loans, and particularly after therestructuring of banks and joint-stock reform, the disposal of non-performing assets hasachieved remarkable results. The data in CBRC official website show that the state-ownedcommercial banks’ non-performing loans balance and bad loans ratio present a "doubledown" trend. But after a careful study of the composition of assets in China,you will findthat there exists a very different fact behind the current trend which seems to become betterthat the decline in bad loans is in fact a huge amount of non-performing loans on thepolicy-based spin-off, and if the impact of the factors is excluded, non-performing loans areon the rise, but the decline in non-performing loan ratio results from the expansion anddilution of the denominator total scale of assets. Therefore, bad assets still hinder thenormal development of the economy in our country, and the disposal of bad assets isdirectly related to the development of China’s banking industry. On the disposal of badloans, domestic and foreign scholars have begun a thorough study, but they have justfocused on the qualitative aspects, and few researches have been made on quantitativeaspects except on pricing, and less study has been made on the time of disposal. OnlyJapanese scholar Naohiko Baba has made preliminary study on the issue which takes badloans disposal income as the dependent variable. However, it is not practical and perational.Therefore it is imperative that we make a deep study on it.This paper, on the basis of the introduction of the theories of the real options andnon-performing assets, describes the current situation of the non-performing assets and thedisposal of it in China. It highlights the problems of bad assets, and shows that the existingdisposal methods and measures cannot solve the problems of bad assets. Second, the paperanalyzes the factors of measuring policies on non-performing assets from four perspectives,and makes the recovery of non-performing assets as the dependent variable, assuming thatchanges in the law obey geometric Brownian motion, and establishes the basic model usingdisposal of the value as the objective function, then deduces the function of non-performingasset pricing and the best time of decision-making using the solution of stochasticdifferential, equations and conditions commonly used in financial product pricing. Third,on the basis of the basic model, the paper analyzes the expectations of recovery and thedependent variable fluctuations respectively, and it gets the best disposal timing of variousnon-performing assets in practice. Finally, with the help of the results of the modelmentioned above, to ensure that the best disposition of non-performing assets in real timecan be implemented, the paper puts forward optimum ways from the macro-environmental,micro-disposal, technical, and financial innovational perspective. This research presents asolution to the problem of the best disposal timing of non-performing assets.