**Suggested APR: Behind the Scenes**

We at Vendor Finance want to provide some more color to any interested users who may be wondering how we can suggest an LTV as well as provide a reference to a suggested interest rate given that LTV.

First of all, the choice of an LTV is completely arbitrary, with the restriction that it does not exceed 100% (public pools can be arbitraged with no risk if you can borrow assets with greater value than your collateral, especially with the option to repay later if this proves untrue before the loan expiry). Since we have a process to analyze recent price volatility (a 30-day sampling of standard deviation), we can suggest a “reasonable” LTV based on this value. Loosely speaking, the less volatile the asset pair, the more likely loans will be repaid by expiry, so higher LTV can be offered. Again, we want to stress that **any** LTV below 100% can work for any asset pair. If the lender wishes to take more risk of default, there is a higher interest rate that adequately covers that risk on average. **Feel free to change this value**, the next recommendation is dependent on your choice and will reflect accurately.

Once the non-APR loan parameters (namely, choice of borrow/lend assets, repayment deadline, and lend ratio) are defined in this fashion, there is a useful financial model that can help to define an appropriate interest rate. Since Vendor loans are not subject to liquidation, and repayment is entirely at the discretion of the borrower, effectively these loans act as a loan with a put option attached (written by the lender, owned by the borrower). Your interest rate is therefore a combination of the “risk-free rate” (i.e. where you would lend assets assuming a guarantee of repayment) and the “optionality” of the right to default. A good proxy for this value would be, in percentage terms, the Black-Scholes option value of a put struck at the lend ratio with an expiry equal to the repayment deadline, at an implied volatility estimated at the recently realized volatility.

In simplified terms, the value of an option tends to correlate with the time to expiration multiplied by the square of volatility (a.k.a. variance). The longer the expiry, the higher this value. The more volatile the asset pair, the higher this value. Our suggested rate is therefore simply the output of Black-Scholes added to the Aave rate for the stablecoin asset being used (we don’t estimate for pairs of non-stable assets, simply because it is difficult to estimate relative volatility reliably with readily available data, especially in the case of long-tail or thinly traded assets).

Admittedly this explanation is a bit technical, but we are happy to field questions in our Discord, linked below!

Twitter: https://twitter.com/VendorFi

Discord: https://t.co/aULpkw6PNa

Website: https://vendor.finance/