Loan-to-Value Ratio Setting of Inventory Impawn Financing Based on VaR Method

This paper study price risk control problems of inventory impawn financing in copper, for example. The value-at-risk (VaR) is the basis of setting reasonable loan-to-value ratio. Choose VaR method to calculate the VaR of Yangtze River 1# copper in different conditions when the loan period is three months, and then inspect the result by back testing, as a basis to determine loan-to-value ratio. Use two indicators which are the risk ratio and the efficiency loss ratio to measure the effectiveness of loan-to-value ratio. Inventory financing means for those enterprises who do not satisfy the requirements for the conventional mortgages, they hand over their own products to a logistic firm and sign off relative contract, therefore the financial institute would provide short term loan to them, it's a new type of value adding service the logistic firms provided to their customers. Besides its efficiency in helping corporate finance, the Inventory financing also improves the benefits for logistic businesses. The development of Inventory financing needs to be based on its efficiency in control risk; among these risks, the price risk is caused by the price drop of collateral material, and there are possible loan losses from lack of collateral value. The method of control is often set up reasonable loan-to-value ratio with the precondition being precisely predict the value of quality material at risk (VaR).