A Variable Payout Information Security Financial Instrument and Trading Mechanism to Address Information Security Risk

A large variety of financial instruments has emerged to allow hedging of risks associated with the underlying assets, whether it is a commodity, weather or economic indicators. However, in the information security domain, cyber-insurance products are the only financial instrument available to hedge the information security risk. Furthermore, cyber-insurance markets are unable or unwilling to accept the high probability and/or high-intensity risks. Thus, there is a need for new financial instruments and a market mechanism to facilitate risk hedging in the information security domain. This article explains the limitations of cyber-insurance market and presents a novel financial instrument and a corresponding trading mechanism to address the problems in the cyber-insurance market. The proposed instrument and trading mechanism can be implemented in an information security prediction market to facilitate the hedging of the risk associated with the underlying information security event or condition. Furthermore, the article demonstrates the application of the proposed financial instrument in an imaginary scenario. Lastly, the article presents an evaluation of the proposed financial instrument and corresponding trading mechanism in hedging the underlying risk. In our analysis, we found that the proposed financial instrument can be a solution, at least to some extent, to the problems in the existing risk hedging mechanisms available in the information security domain.