Criticality Analysis on Value-at-Risk Model of Loan-to-Value Ratios Decision in Inventory Financing of Supply Chain Finance

Zhigao Liao¹, Xin Yu², Jiuping Xu²

¹School of Management, Guangxi University of Science and Technology, Liuzhou, China.
²Uncertainty Decision-Making Laboratory, School of Business and Administration, Sichuan University, Chengdu, China.

DOI: 10.4236/oalib.1102224                

Abstract

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.

Keywords

Inventory Financing of SCF, Critical Order Quantity, Extreme of Loan VaR, Critical LTV

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	Hu, Y.F. and Huang, S.Q. (2009) Supply Chain Finance: Background, Innovation and Conception Definition. Journal Research on Financial and Economic Issues, 309, 76-82.
[2]	Atkinson, W. (2008) Supply Chain Finance—The Next Big Opportunity. Supply Chain Management Review, 3, 57-60.
[3]	Guo, A.Y. (2009) An Outstanding Use of Soft Science-Shenzhen Development Bank with the Management o Business Innovation in Finance as an Example. China Soft Science, 12, 152-164.
[4]	Hofmann, E. (2009) Inventory Financing in Supply Chains: A Logistics Service Provider-Approach. International Journal of Physical Distribution & Logistics Management, 39, 716-740. http://dx.doi.org/10.1108/09600030911008175
[5]	Buzacott, J.A. and Zhang, R.Q. (2004) Inventory Management with Asset-Based Financing. Management Science, 50, 1274-1292. http://dx.doi.org/10.1287/mnsc.1040.0278
[6]	Yi, X.H. and Zhou, Z.F. (2011) Pricing Decisions on Inventory Financing of the Banks with Core Enterprises’ Buyback Guarantee. Journal System Engineering, 1, 38-44.
[7]	Wong, E., Feng, T., Li, K.F. and Choi, H. (2011) Loan-to-Value Ratio as a Micro-Prudential Tool—Hong Kong’s Experience and Cross-Country Evidence. Working Paper 01/2011, Hong Kong Monetary Authority, Hong Kong, 1-26.
[8]	Yu, H. and Zhen, X.P. (2010) Loan-to-Value Ratios Model of Pledge by Warehouse Receipts for Small and Medium Enterprises. Chinese Journal of Management Science, 6, 104-112.
[9]	Funke, M. and Paetz, M. (2012) A DSGE-Based Assessment of Nonlinear Loan-to-Value Policies: Evidence from Hong Kong. BOFIT Discussion Papers No. 11, 1-22. http://dx.doi.org/10.2139/ssrn.2049783
[10]	Li, Y.X., Feng, G.Z. and Xu, Y. (2007) Research on Loan-to-Value of Inventory Financing under Randomly-Fluctuant Price. Systems Engineering-Theory & Practice, 12, 42-48.
[11]	Qi, M. and Yang, X.L. (2009) Loss Given Default of High Loan-to-Value Residential Mortgages. Journal of Banking & Finance, 33, 788-799. http://dx.doi.org/10.1016/j.jbankfin.2008.09.010
[12]	Liberti, J.M. and Mian, A.R. (2010) Collateral Spread and Financial Development. Journal of Finance, 65, 147-177. http://dx.doi.org/10.1111/j.1540-6261.2009.01526.x
[13]	Jorion, P. (1996) Risk2: Measuring the Risk in Value at Risk. Financial Analysts Journal, 52, 47-56. http://dx.doi.org/10.2469/faj.v52.n6.2039
[14]	Jorion, P. (2006) Value at Risk the New Benchmark for Managing Financial Risk. 3re Edition, The McGraw-Hill Companies, Inc., New York.
[15]	Duffie, D. and Pan, J. (1977) An Overview of Value at Risk. The Journal of Derivatives, 3, 7-49.
[16]	He, J., Jiang, X.L., Wang, J., Zhu, D.L. and Zhen, L. (2012) VaR Methods for the Dynamic Impawn Rate of Steel in Inventory Financing under Auto Correlative Return. European Journal of Operational Research, 223,106-115. http://dx.doi.org/10.1016/j.ejor.2012.06.005