# Using Financial Instruments to Transfer the Information Security Risks
## 7 Demonstration: An Example Application
### Information Security Options
#### 7.1.4 Risk Hedging
\begin{table}
\begin{tabular}{p{113.8 pt} p{113.8 pt} p{113.8 pt}} \hline \hline
**Participant** & **Trading Side** & **Incentive/Motivation** \\ \hline Oil Company’s Cyber-Security Product \"V\" & & To convince others through the display of strong faith that their system is strong and will meet the pre-specified performance requirements for the oil industry. \\ \hline Competitors of Vendor \"V\" & Buy & To convince others through the display of strong signal that the system of “_V\"_ is not able to meet the desired performance and they can develop or have better products to meet the desired requirements. \\ \hline Investors in Company \"O\" & Buy/Sell & To hedge their risk or to profit from trading in the contract. The buy or sell decision depends on investor’s individual belief. Investors try to earn profit by predicting the future price movements or the probability of the underlying event based on the any relevant information they may have. \\ \hline Cyber-Insurers and Re-insurers & Buy/Sell & To hedge their risk or to profit from trading in the contract. The buy or sell decision is based on their individual risk portfolio. \\ \hline Speculators & Buy/Sell & This category includes a range of market participants, such as hedge funds, proprietary trading firms, individual traders, and so on. These traders participate (buy or sell) to earn a profit by predicting the future price movements or the probability of the underlying event based on the any relevant information they may have. \\ \hline Security Researchers & Buy/Sell & Security researchers in possession of some relevant information may participate in trading of the contract. Moral and ethical aspects, such as [97], are ignored. \\ \hline \hline \end{tabular}
\end{table} 
Table 11: _Cont._\"Marking-to-Future\" method [100]. The marking-to-future method gives the expected future value of the value at risk. The expected future value of the value at risk can be calculated as in Equation (23). \[\text{Expected Future Value}=\alpha=\sum_{i=1}^{N}\rho_{i}\mu_{i} \tag{23}\]  
where, \(\rho\) is the probability of the risk event and \(\mu\) is the impact value of the event. (2.1) Unhedged Scenario  
Based on the market participant's estimate, if the oil company remains unhedged to the risk exposure to U1 then the expected future value is calculated as in Equation (24). \[\alpha_{m}=(\rho_{s_{1}}*\mu_{u_{1}})+(\rho_{s_{2}}*\mu_{u_{1}}) \tag{24}\]  
where, \(\alpha_{m}\) is the market's expected future value (unhedged), \(\rho_{s_{1}}\) is the probability of \(s_{1}\), \(\mu_{u_{1}}\) is the impact value (unhedged) for state 1, \(\rho_{s_{2}}\) is the probability of \(s_{2}\), \(\mu_{u_{2}}\) is the impact value (unhedged) for state 2. The expected future value from the market's perspective in an unhedged scenario is shown in Figure 7, and calculated as shown in Equation (25). \[\alpha_{m}=(20\%*(-\$40,000))+(80\%*(\$20,000))=\$8000 \tag{25}\]  
On the other hand, the expected future value based on the company's CVaR model in an unhedged scenario can be calculated as shown in Equation (26). \[\alpha_{c}=(\rho_{s_{1}}*\mu_{u_{1}})+(\rho_{s_{2}}*\mu_{u_{2}}) \tag{26}\]  
where, \(\alpha_{c}\) is the expected future value (unhedged) based on the CVaR model, \(\rho_{s_{1}}\) is the probability of \(s_{1}\), \(\mu_{u_{1}}\) is the impact value (unhedged) for state 1, \(\rho_{s_{2}}\) is the probability of \(s_{2}\), and \(\mu_{u_{2}}\) is the impact value (unhedged) for state 2. The expected future value from the company's perspective in an unhedged scenario is shown in Figure 8, and calculated as shown in Equation (27). \[\alpha_{c}=(50\%*(-\$40,000))+(50\%*(\$20,000))=-\$10,000 \tag{27}\]  
Figure 7: Unhedged Expected Future Value for Market’s Probability Estimate. Thus, in the unhedged scenario there is a large variance between the expected future value by market participants (+$8000) and the expected future value as per the CVaR model (\(-\$10,000\)).