A two-period option model of a bank was used to determine the optimal lending under future capitalization is developed. The optimal lending on the market value of bank equity under future expandability or reversibility is that the first-period marginal equity value of lending is equal to the second-period marginal equity value. A principal finding supports a conclusion for securing of bank loans that an increase in volatility may make the bank become conservative. This conservative lending may be influenced by the expected decreasing resale price and by the expected increasing purchase price of future equity capital.
International Journal of Management 20(2), pp.179-186