Inventory Financing Research Articles

Downgrades, Dealer Funding Constraints, and Bond Price Pressure

Regulatory constraints imposed on insurance companies can induce a collective need to divest downgraded bond issues. Upon a downgrade, corporate bond dealers act as middlemen and provide liquidity by absorbing temporary order-flow imbalances. Limited access to inventory financing can temporarily limit dealers' inventory and risk-bearing capacities and, at least in the short run, impair liquidity provision. Using insurance company transaction data, I investigate if dealer funding constraints (as proxied by their CDS spreads) amplify price declines and stall subsequent reversals of downgraded bonds. I find that bonds handled by constrained dealers (with higher CDS spreads) are associated with substantially larger and abrupt declines and slower reversals of abnormal returns around a downgrade.

Optimal Strategies for Inventory Financing with Capital Constrained

Optimal Strategies for Inventory Financing with Capital Constrained

Application of BSDE in Standard Inventory Financing Loan

This paper examines the issue of loans obtained by the small and medium-sized enterprises (SMEs) from banks through the mortgage inventory of goods. And the loan-to-value (LTV) ratio which affects the loan business is a very critical factor. In this paper, we provide a general framework to determine a bank’s optimal loan-to-value (LTV) ratio when we consider the collateral value in the financial market with Knightian uncertainty. We assume that the short-term prices of the collateral follow a geometric Brownian motion. We use a set of equivalent martingale measures to build the models about a bank’s maximum and minimum levels of risk tolerance in an environment with Knightian uncertainty. The models about the LTV ratios are established with the bank’s maximum and minimum risk preferences. Applying backward stochastic differential equations (BSDEs), we get the explicit solutions of the models. Applying the explicit solutions, we can obtain an interval solution for the optimal LTV ratio. Our numerical analysis shows that the LTV ratio in the Knightian uncertainty-neutral environment belongs to the interval solutions derived from the models.

Middlemen Matter: Corporate Bond Market Liquidity and Dealer Inventory Funding

Corporate bond dealers build up considerable inventories for which they rely on short-term funding. I provide empirical evidence that dealers' inventory financing constraints are a crucial determinant of the costs of their liquidity provision in corporate bond markets. Constructing a unique dataset that links dealer identities with transaction prices, I show that dealer-specific financing constraints (as proxied by their CDS spreads) explain a substantial part of the variation in the inventory cost component of the effective bid-ask spread. Compared to low volatility bonds, the liquidity provision of high volatility bonds is more sensitive to inventory costs, especially during periods of funding stress. Finally, exploiting a quasi-natural experiment, I show that the relaxation of funding constraints through a Federal Reserve emergency credit facility temporarily alleviates liquidity problems among eligible dealers.

Analysis on Logistic Contract for FPLs Two-sided Bargaining Game in Agricultural Product Financing

Agricultural product financing has an important practical significance to expand application scope of inventory financing. However, agricultural products are perishable, seasonal, difficult to transport and storage etc., which requires that agricultural product financing depends on higher level logistic service providers. Therefore, this paper introduces the fourth-party logistics (FPLs) with the ability of resource integration and scheme optimization into the model. Aim to price determination of logistics tasks in agricultural product financing, this paper analyzes the issue between FPLs and banks and TPLs (third-party logistics) under asymmetric information by using Rubinstein bargaining game theory. The study finds that FPLs’ offer is regardless of their own patience, banks’ offer and TPLs’ offer are related to their own cost of competing logistics tasks, and FPLs’ bargaining order will affect their offer.

Trade Credit, Risk Sharing, and Inventory Financing Portfolios

As an integrated part of a supply contract, trade credit has intrinsic connections with supply chain coordination and inventory management. Using a model that explicitly captures the interaction of firms' operations decisions, financial constraints, and multiple external financing channels (bank loans and trade credit), this paper attempts to develop a deeper understanding of the risk-sharing role of trade credit, that is, trade credit enhances supply chain efficiency by allowing the retailer to partially share the demand risk with the supplier. Within this role, in equilibrium, trade credit is an indispensable external source for inventory financing, even when the supplier is at a clearly disadvantageous position in managing default than a bank. Specifically, the equilibrium trade credit contract is net terms when the retailer's financial status is relatively strong. Accordingly, trade credit is the only external source the retailer uses to finance inventory. By contrast, if the retailer's cash level is low, the supplier offers two-part terms, inducing the retailer to finance inventory with a portfolio of trade credit and bank loans. Further, a deeper early-payment discount is offered when the the supplier is relatively less efficient in recovering defaulted trade credit, or the retailer has stronger market power. Trade credit allows the supplier to take advantage of the retailer's financial weakness, yet it may also benefit both parties when retailer's cash is reasonably high. Finally, using a sample of firm-level data on US-based retailers, we empirically observe the inventory financing pattern that is consistent with what our model predicts.

Revised Article 9 of the Uniform Commercial Code: Implications for the Canadian Personal Property Security Acts

The Personal Property, Security, Acts (PPSAs) in effect in the Canadian common law provinces have their intellectual roots in the 1972 version of Article 9 (Secured Trans- actions) of the Uniform Commercial Code in the United States. Article 9 has recently, undergone a complete revision. This article offers a comparative overview of the new regime. The authors begin by identifying those features of the new Article 9 for which analogous provision already is made in all or most of the PPSAs. They then analyze certain other new features, which they do not believe should be exported to a Canadian context. The most notable of these are the designation of the debtor's law as the universal choice of law rule for perfection (but not priority) of all security, interests, and the introduction of special perfection and priority rules for security interests in deposit accounts and sales of payment intangibles. The authors then review a miscellany of other provisions of the new Article 9 which they believe do merit consideration for adaptation into the PPSAs, including an explicit provision for cross-collateralization in purchase money inventory financing. In their conclusion, the authors offer some more general observations on the overall style and policy implications of the new Article 9. They conclude that the increased emphasis on more detailed and specialized rules may paradoxically lead to greater uncertainty because of the increased complexity. More fundamentally, it puts into question the basic premise of both Article 9 and the PPSAs that the functional identity of all secured transactions demands an essentially unitary regulatory framework.

A Study on the Pricing Model for 3PL of Inventory Financing

Being a new research area, logistics finance solves the contradiction between banks and SMEs (small and medium enterprises) about financing; it is beneficial to financial market and logistics market development too. As a service innovation, it unites the interests of bank, 3PL (third-party logistics) providers, and SMEs and integrates material, finance, and information. Logistics finance has been developed in recent years in China, but the research is not enough on 3PL enterprises. On the background of that, the paper makes a research in the field of logistics finance with different pricing methods, based on the perspective of third-party logistics enterprises. This paper proposes a pricing model of inventory financing that can maximize the cash flow of 3PL enterprise, when the default rate of the small- and medium-sized enterprise is affected by the pledge price. And then this paper studies the model of inventory financing that can maximize the cash flow of enterprise under the condition of the existence of cash discount rate. The core factors affecting the loan-to-value ratio were established through analysis of mathematical model. We also consider the loan-to-value ratio of cash discount rate in the model. Results show that in the pledge of the known function and cash discount the price change can be calculated to meet enterprise cash flow lending rates and get biggest loan-to-value ratio.

Research on Financing Model of the Chinese SMEs in Supply Chain Finance

In recent years, with the quickly development of the supply chain finance, the cost of corporate finance would become an important way for enterprises to solve their financial problems. In China, the financing model of supply chain finance mainly for accounts receivable financing, inventory financing pledge financing, advances and financing. Three financing models are used in different larger companies in common. But due to the presence of their own problems, financial supply chain financing model has not been effective used in the small and medium enterprises (SMEs). This paper first describes the major financing model of supply chain finance. Moreover, some problems existing in the supply chain financing in the process of SMEs will be exposed. Finally, aiming at the problems and putting forward the method to solve the problem and to inventory pledge mode as an example, the paper puts forward an optimized scheme.

Inventory Financing under Stochastic Demand and Order Decisions

Based on the Newsvendor Model, this paper discusses distributor's financing and ordering decisions under stochastic inventory financing needs, then establishes profit maximization model and profit margin maximization model for distributors under risk-neutral and risk-averse conditions respectively and finally propose optimal solutions for the models. The main conclusions from the models are that with the increase in financing costs, the order quantity and financing amount increase, then the profit and profit margin decline; with the increase in financing costs, the order quantity and financed amount decrease, then the profits and profit margins are cut down;the corresponding order quantity and financed amount in these two models increase, then the profits and profit margins increase accordingly.

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

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.

The Order Quantity Decision of Newsboy Retailer with Financing

AbstractWe analyze the retailer’s optimal order with capital constraint under stochastic demand. We consider the impact of external financing, that is inventory financing, and the internal financing, that is trade credit, on the order strategy of retailer separately. We establish revenue model of retailer and solve, and give revenue of retailer and supplier respectively. Finally, we give the impact of own funds on the retailer’s order quantity, retailer’s revenue, supplier’s revenue, as well as the impact on the overall revenue gains of the supply chain. And some analysis and statement are also given in the end.

Incentive regulation of banks on third party logistics enterprises in principal-agent-based inventory financing

In inventory financing, asymmetric information between banks and the third party logistics enterprises may incur moral risks, often causing economic losses of banks. To effectively solve this problem, a pure incentive scheme and a regulatory incentive scheme are designed with the principal-agent theory. By comparison, it is found that the pure incentive model is not applicable to practical conditions, and regulatory incentive model can not only solve practical problems substantially but also outbalance pure incentive model under certain conditions. The research results from example analysis given in this paper offer theoretical instruction and a practical method for effective regulation of banks.

Guest editorial of “Intelligent logistics and supply chains”

Information and communication technology (ICT) has been considered as an enabling tool for having more effective and efficient operations in the management of logistics and supply chains for many years. Various information and communication technologies are used to improve performance of the logistics and supply chain network, such as ‘‘data mining’’, ‘‘radio frequency identification (RFID)’’, ‘‘machine learning’’, ‘‘smart transportation’’. While ICT systems are vital components in logistics and supply chains, their successful management rests on intelligent and integrated decision making throughout the logistics network. Intelligent decision technologies are applied to collect and store real-time data and then analyze and interpret the data and information of product, inventory, manufacturing and sales to discover useful knowledge for making better operation and management decisions. Advanced simulation and optimization of planning and scheduling systems are also used for improvement of inventory, production, procurement, and distribution planning. Intelligent agents can communicate with different partners in the supply chain, assist in collecting information, share product information, negotiate prices, and distribute alerts throughout the logistics and supply chains networks. Many artificial intelligence (AI) technologies or systems have been implemented recently or are currently in the stage of implementation. We arranged the 3rd International Workshop of Advanced Manufacturing and Automation (IWAMA 2013) on 27–28th October, 2013 at Norwegian University of Science and Technology, Norway. The topics of IWAMA 2013 focused on: (1) intelligent manufacturing technologies; (2) intelligent logistics and supply chains; and (3) intelligent diagnosis and prognosis of wind turbines. After the workshop, we carefully select good papers and ask the authors to modify and extend their papers for further publishing as two special issues in Advances in Manufacturing: (1) Intelligent Manufacturing Technologies, and (2) Intelligent Logistics and Supply Chains. This is the second special issue and it is organized as the following: Chapter 1 presents review and analysis of ontology based interoperability solutions within textile supply chain. Chapter 2 describes the development of intelligent and integrated RFID (II-RFID) system for improving traceability and visibility of manufacturing. A new method of integrating adaptive sliding window and Euclidian distance for filtering RFID unreliable data is presented in Chapter 3. Chapter 4 investigates front-load effects of product development using system dynamics in order to approach lean production development. Chapter 5 describes an industrial case of a Norwegian supplier of ship equipment for realizing automation process in the ETO production situation. Chapter 6 presents incentive regulation of banks on third party logistics enterprises in principal-agent-based inventory financing. Chapter 7 shows a framework for real time production planning and control. Chapter 8 investigates the specific planning environment of an automotive part manufacturer and characterizes this environment based on variables regarding the product, its demand and manufacturing process. Chapter 9 deals with order batching problem, which has a major effect on the efficiency of warehouse operation in logistics in order to Y. Wang School of Material, The University of Manchester, Manchester, UK

Reducing national freight logistics costs risk in a high-oil-price environment

Purpose – South Africa's logistics cost measurement was expanded to include externality costs, and scenarios based on the key exogenous risks were developed to inform mitigation strategies. This paper aims to discuss these issues. Design/methodology/approach – The research approach is quantitative, based on a gravity-orientated freight flow model, a road transport cost model, actual transport costs for other modes, a warehousing cost survey, an inventory delay calculation (to inform warehousing cost calculations and inventory financing costs) and an externality cost calculation. Findings – Transport cost pressures are expected to deteriorate due to the increasingly negative outlook for the oil price and the internalisation of externality costs. The nature of these forces compels transport cost challenges to be addressed strategically through collaborative, industry-wide and even nationwide initiatives. Research limitations/implications – Key limitations are inconsistent commodity classification schemes across information sources, and incomplete container content data. The researchers are collaborating with information providers to address these issues and refine model accuracy and forecasting. Practical implications – The exogenous risks strengthen the argument for new approaches to South Africa's logistics cost challenges driven by the high densities of corridor freight flows. Social implications – The inclusion of externality costs highlighted the negative environmental impact of the current modal configuration and provides impetus for change. Originality/value – Major advancements to logistics cost modelling were made by incorporating externality costs and developing scenarios for risk mitigation. Freight flow data granularity (in excess of one million records) allows both aggregation to national-level intelligence to inform policies, large-scale infrastructure investments and industrial positioning, and disaggregation to enable practical application.

The long‐term extreme price risk measure of portfolio in inventory financing: An application to dynamic impawn rate interval

Different from the short‐term risk measure for traditional financial assets (stocks, bonds, etc.), the key to illiquid inventory portfolio traded in the over‐the‐counter markets is to estimate the long‐term extreme price risk with time varying volatility. In this article, a new long‐term extreme price risk (value at risk and conditional value at risk) measure method for inventory portfolio and an application to dynamic impawn rate interval are proposed. To realize this, we first establish AutoRegressive Moving Average‐Exponential Generalized Autoregressive Conditional Heteroskedasticity‐Extreme Value Theory model and multivariatet‐Copula to depict the autocorrelation, fat tails, and volatility clustering of returns of inventories and the nonlinear dependence structure of inventories. Furthermore, we obtain the long‐term extreme price risk with time varying volatility via Monte Carlo simulation instead of square‐root‐of time rule. The results show that, first, benefits from risk diversification is significant; second, long‐term extreme price risk measure of inventory portfolio via Monte Carlo method outperforms the square‐root‐of time rule; the last is that the dynamic rate interval based on the long‐term price risk is superior to the crude rules of thumb in terms of reducing efficiency loss and improving risk coverage. In summary, this article provides a new quantitative framework for managing the risk of portfolio in inventory financing practice for banks constrained by risk limitation. © 2014 Wiley Periodicals, Inc. Complexity 20: 17–34, 2015

Effect analysis on supply chain performance based on inventory pledging financing

Effect analysis on supply chain performance based on inventory pledging financing

Robust Inventory Financing Model with Partial Information

Given current fast-changing market conditions and difficulty in obtaining financing for small- and medium-sized enterprises, this paper studies the robust inventory financing model under partial information, that is, where the demand distribution is partly known. Two demand information cases are discussed: (1) the mean and variance and (2) the support of the demand distribution. In this setting, the robust method that maximizes the worst-case profit and minimizes the firm’s maximum possible regret of not acting optimally would be used to formulate the optimal sales quantity. We show that the approach used in this paper is tractable, and we provide an explicit expression for the robust optimal policy. We then use numerical examples to compare the firm’s losses under two demand information cases with those occurring under demand certainty. More importantly, the numerical examples indicate that our robust inventory financing model can obtain a robust but not conservative solution.

The Pledge Rate Research of Copper and Zinc Inventory Portfolio Based on Copula-VaR Method

This paper selects copper and zinc as a stock portfolio of mortgage financing. It calculates stock portfolio return risk by the value at risk method, introduces Copula function to measure the two pledges' relationship, simulates portfolio yield trend by Monte Carlo method to get Var value. At last compare Copula-Var method with traditional method, The new method can reflect more collateral prices spike characteristics, estimated loss better when value at risk. The conclusion of the study establishes the foundation for further study on the theory and methods of inventory financing portfolio.

System Dynamics Modeling and Simulation for Capital-constrained Supply Chain Based on Inventory Financing

System Dynamics Modeling and Simulation for Capital-constrained Supply Chain Based on Inventory Financing