Abstract: Determining appropriate loan-to-value ratios of commodity collateral can make banks 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 modelon loan-to-value ratios.In this model,some factors,such as risk appetite of banks,expected rate of return and price volatility of commodity 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.

Key words: inventory financing, loan-to-value ratios, commodity collateral, credit risk