The impacts of uncertainties in a real options model under incomplete information

This paper examines the impact with respect to the uncertainty of the underlying state variable, profit uncertainty, on the real options model in a situation of incomplete information. Profit uncertainty has not incorporated into the real options model under incomplete information, in that the underlying state variable is not formulated as the stochastic process (see, e.g., Bernardo, A. E., Chowdhry, E. B., 2002. Resources, real options, and corporate strategy. Journal of Financial Economics, 63, 211–234). We extend the model developed by Bernardo and Chowdhry to formulate the underlying state variable as the stochastic process. We conclude that profit uncertainty has the same type of impact on the real options value and its triggers, both under complete and incomplete information.