K. Matsuura. ``Security Tokens and Their Derivatives''. Technical Reports 29, Centre for Communications Systems Research, University of Cambridge, Feb. 2001. (Full text (PDF))

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(Abstract) The primary purpose of this paper is to model uncertain digital objects in view of financial risk management in an open network. We have made an abstraction of the objects and defined the security token, which is abbreviated into a word coinage setok. Each setok has its price, values, and timestamp on it as well as the main contents. Not only the price but also the values can be uncertain and may cause risks.

A number of properties of the setok are defined. They include value response to compromise, price response to compromise, refundability, tradability, online divisibility, and offline divisibility. Then, in search of risk-hedging tools, a derivative written not on the price but on the value is introduced. The derivative investigated is a simple European-type call option. With the help of stochastic theory, we have derived several option-pricing formulae. These formulae do not require any divisibility of the underlying setok.

With respect to applications, an inverse estimation of compromise probability is studied. The stochastic approach is extended to deal with a jump caused by the compromise and the resultant revocation. This extension gives a partial differential equation (PDE) to price the call option; given a set of parameters including the compromise probability, the PDE can tell us the option price. By making an inverse use of this, we can estimate the risk of compromise.

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(Keywords) network security, digital object, setok, risk hedge, derivative, option pricing.

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