# Using Financial Instruments to Transfer the Information Security Risks
## 7 Demonstration: An Example Application
### Information Security Swaps
#### 7.3.4 Risk Hedging
In a perfectly hedged scenario, the expected future value (hedged) from the counterparty's perspective can be calculated as shown in Equation (58). Figure 15:1  
where, \(\beta_{s}\) is the expected future value (hedged) from the seller's (counterparty's) perspective, \(\rho_{s1}\) is the probability of \(s_{1}\), \(\mu_{h1}\) is the impact value (hedged) for state 1, \(\rho_{s2}\) is the probability of \(s_{2}\), \(\mu_{h2}\) is the impact value (hedged) for state 2, \(\rho_{s3}\) is the probability of \(s_{3}\), \(\mu_{h3}\) is the impact value (hedged) for state 3, \(\rho_{s4}\) is the probability of \(s_{4}\), and \(\mu_{h4}\) is the impact value (hedged) for state 4. The expected future value from the seller's perspective in a hedged scenario is shown in Figure 17, and calculated as shown in Equation (59). Figure 15:2  
\(\bullet\)\(\mu_{h1}=\Figure 15:310,000\) paid for the premium. \(\bullet\)\(\mu_{h2}=-\Figure 15:4150,000\) payout from ISS contract \(-\Figure 15:5350,000\) loss due to cyber-attack \(+\Figure 15:610,000\) paid for the premium. Figure 15:7 Hedged Expected Future Value for Counterparty’s Probability Estimate. In a perfectly hedged scenario, the expected future value from the satellite company's perspective can be calculated with the Equation (60). Figure 15:8  
where, \(\beta_{c}\) is the satellite company's (buyer's) expected future value (hedged), \(\rho_{s1}\) is the probability of \(s_{1}\), \(\mu_{h1}\) is the impact value (hedged) for state 1, \(\rho_{s2}\) is the probability of \(s_{2}\), \(\mu_{h2}\) is the impact value (hedged) for state 2, \(\rho_{s3}\) is the probability of \(s_{3}\), \(\mu_{h3}\) is the impact value (hedged) for state 3, \(\rho_{s4}\) is the probability of \(s_{4}\), and \(\mu_{h4}\) is the impact value (hedged) for state 4. The expected future value from the satellite company's perspective in a hedged scenario is shown in Figure 18, and calculated as shown in Equation (61). Figure 15:9  
\(\bullet\)\(\mu_{h1}=\\[\alpha_{s}=(\rho_{s1}*\mu_{u1})+(\rho_{s2}*\mu_{u2})+(\rho_{s3}*\mu_{u3})+(\rho_{ s4}*\mu_{u4}) \tag{53}\]010,000\) paid for the premium. \(\bullet\)\(\mu_{h2}=-\\[\alpha_{s}=(\rho_{s1}*\mu_{u1})+(\rho_{s2}*\mu_{u2})+(\rho_{s3}*\mu_{u3})+(\rho_{ s4}*\mu_{u4}) \tag{53}\]1150,000\) payout from ISS contract \(-\\[\alpha_{s}=(\rho_{s1}*\mu_{u1})+(\rho_{s2}*\mu_{u2})+(\rho_{s3}*\mu_{u3})+(\rho_{ s4}*\mu_{u4}) \tag{53}\]2350,000\) loss due to cyber-attack \(+\\[\alpha_{s}=(\rho_{s1}*\mu_{u1})+(\rho_{s2}*\mu_{u2})+(\rho_{s3}*\mu_{u3})+(\rho_{ s4}*\mu_{u4}) \tag{53}\]310,000\) paid for the premium. \(\bullet\)\(\mu_{h4}=-\\[\alpha_{s}=(\rho_{s1}*\mu_{u1})+(\rho_{s2}*\mu_{u2})+(\rho_{s3}*\mu_{u3})+(\rho_{ s4}*\mu_{u4}) \tag{53}\]4500,000\) payout from ISS contract \(-\\[\alpha_{s}=(\rho_{s1}*\mu_{u1})+(\rho_{s2}*\mu_{u2})+(\rho_{s3}*\mu_{u3})+(\rho_{ s4}*\mu_{u4}) \tag{53}\]5500,000-(\\[\alpha_{s}=(\rho_{s1}*\mu_{u1})+(\rho_{s2}*\mu_{u2})+(\rho_{s3}*\mu_{u3})+(\rho_{ s4}*\mu_{u4}) \tag{53}\]610,000)}{\$500,000}\right)*100=-2\% \tag{62}\]  
\[\alpha_{s}=(\rho_{s1}*\mu_{u1})+(\rho_{s2}*\mu_{u2})+(\rho_{s3}*\mu_{u3})+(\rho_{ s4}*\mu_{u4}) \tag{53}\]7 Hedged Expected Future Value for Company’s Probability Estimate. where, we have considered the premium paid as the cost of hedge and other associated costs, such as interest rate, _etc._ have been ignored. A hedge efficiency of \(-2\%\) indicates that the hedge strategy is \(2\%\) less efficient than the perfect hedge strategy.