There is an alternative solution that I just tested. It requires the use of the terminal.
You must have not already deleted your existing vm. In-fact, you will edit it, so I also recommend backing it up somewhere.
Note that in my case, I have my parallels vm's stored at: /Volumes/My_External_Drive/parallels vms/
Adjust the commands accordingly.
Create a new/temporary VM, which will re-download Windows 11 for ARM, and configure it for Parallels. Once Windows is booted, shut it down. I will name the temporary vm "tempwin.pvm"
At terminal, navigate to within your EXISTING/OLDER Parallels pvm file (which is actually a directory under the hood).
Example:
r@Ryans-Mac-Studio Windows 11.pvm % pwd
/Volumes/My_External_Drive/parallels vms/Windows 11.pvm
then type:
rm -rf harddisk.hdd
You will then move the harddisk.hdd folder from the new vm and to the existing vm.
r@Ryans-Mac-Studio Windows 11.pvm % pwd
/Volumes/My_External_Drive/parallels vms/Windows 11.pvm
r@Ryans-Mac-Studio Windows 11.pvm % mv /Volumes/My_External_Drive/par
allels\ vms/tempwin.pvm/harddisk.hdd .
NOTE: The space and then period at the end of the command is required.
You may now delete the new/temp vm from parallels and your mac drive.
Boot your existing vm, which now has a new virtual hard disk. Windows activation will fail.
Wait a minute or so at desktop, and then open settings. Search for activation settings and manually trigger the activation. In my case, it succeeded.