Creditor's Optimal Contract in Inventory Pledge Loan

This paper examines the optimal interest rate and loan to value (LTV) according to the price risk and liquidity risk of collateral in inventory pledge loan. Under endogenous default probability and symmetric information assumption, solve the value of interest rate and LTV maximizing creditor's expected revenue confined by market structure. The main conclusion is that explicit interest rate and LTV ratio of optimal contract both increase as liquidity risk increases, whereas price risk has reverse effect for normal distribution. Numerical examples prove these conclusions on the whole and fit with reality roughly.