On Loan-to-Value Ratios of Inventory Financing with Doubly Stochastic Poisson Default Processes

To determine appropriate loan-to-value ratios of inventory collateral can make bank mitigate credit risk of inventory financing effectively. Based on reduced-form approaches, this paper assumes that the default of the enterprise is exogenous and follows a doubly stochastic Poisson process, and then provides a model on the determination of loan-to-value ratios for banks. In this model, some factors, such as risk appetite of banks, expected rate of return and price volatility of collateral, frequency of marking to market and maturity time of loan, are considered synthetically, so banks may determine appropriate loan-to-value ratios of particular inventory financing operation to keep the level of taken risk consistent