Using Financial Instruments to Transfer the Information Security Risks

Abstract

For many individuals and organizations, cyber-insurance is the most practical and only way of handling a major financial impact of an information security event. However, the cyber-insurance market suffers from the problem of information asymmetry, lack of product diversity, illiquidity, high transaction cost, and so on. On the other hand, in theory, capital market-based financial instruments can provide a risk transfer mechanism with the ability to absorb the adverse impact of an information security event. Thus, this article addresses the limitations in the cyber-(re)insurance markets with a set of capital market-based financial instruments. This article presents a set of information security derivatives, namely options, vanilla options, swap, and futures that can be traded at an information security prediction market. Furthermore, this article demonstrates the usefulness of information security derivatives in a given scenario and presents an evaluation of the same in comparison with cyber-insurance. In our analysis, we found that the information security derivatives can at least be a partial solution to the problems in the cyber-insurance markets. The information security derivatives can be used as an effective tool for information elicitation and aggregation, cyber risk pricing, risk hedging, and strategic decision making for information security risk management.

Modeling and management of cyber risk: a cross-disciplinary review

“…The underdevelopment of cyber reinsurance manifests reinsurers' fear of excessive losses, which may require new reinsurance structures to limit their risk exposure. Alternative avenues of investment in the form of cyberlinked derivatives include options, vanilla options, swaps, and futures (Pandey & Snekkenes, 2016). Catastrophe bonds designed on EVT approaches are developed by Xu and Zhang (2021) and Liu et al (2021) to transfer tail risks faced by cyber insurers to the capital market.…”

Analytical Modeling and Empirical Analysis of Binary Options Strategies

“…Ref. [38] investigates how various financial derivatives, such as binary options, can be used to transfer information security risk.…”

A Secured and Trusted Demand Response system based on Blockchain technologies

“…For instance, the smart contract can be programmed such that if the customer fails to make payment on time, then the smart contract's execution would automatically arrange for the suspension of power supply until the payment is settled. Moreover, Smart Contracts can be programmed to mitigate (hedge) the risks associated with the fluctuation in energy prices, security risks, and so on [31]. Through this implementation it is expected that key benefits of Smart Contracts will be fully exploited, including but not limited to the ability to: 1) reduce transaction costs in creating, monitoring, and reacting to obligations; 2) use new properties for analyzing contractual arrangements that are only possible when they exist in machine-processable form; and 3) enable autonomous, computer-to-computer, contracting.…”