Most literatures prefer loan-to-value ratios (LTV) decisions in supply
chain finance (SCF) on the way of profit maximization. This paper attempts to
discuss the relationship between LTV and market risk of the loan in inventory
financing of SCF from the perspective of value at risk (VaR) for the critical
value of LTV corresponding to extreme value of loan VaR to prevent the bank
from the risks caused by LTV decisions under the extreme position of
price-decline in commodity market. Different from the traditional method of VaR
only considering the asset value, we incorporate the borrower’s financial and
procurement positions into VaR model. We demonstrate the critical value of LTV
corresponding to extrema of the value-at-risk of loan in nonlinear analysis, as
well as the critical order quantity that can monotonically affect the
relationship between LTV and loan VaR in linear analysis, followed by the conclusion
that higher investment may not mean higher risk from the perspective of VaR in
inventory financing of SCF. Furthermore, the impact of parameters involving
financial and procurement positions of the borrower is discussed to explore the
affections to the bank from the borrower’s procurement decisions.
Cite this paper
Liao, Z. , Yu, X. and Xu, J. (2015). Criticality Analysis on Value-at-Risk Model of Loan-to-Value Ratios Decision in Inventory Financing of Supply Chain Finance. Open Access Library Journal, 2, e2224. doi: http://dx.doi.org/10.4236/oalib.1102224.
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