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

Zhigao Liao; Xin Yu; Jiuping Xu

doi:10.4236/oalib.1102224

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Open Access Library Journal > Vol.2 No.12, December 2015

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 PDF HTML XML 601 Downloads 1,118 Views

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

Share and Cite:

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, 1-17. doi: 10.4236/oalib.1102224.

Conflicts of Interest

The authors declare no conflicts of interest.

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