Using real options to value losses from cyber attacks

Abstract

When traditional assets are lost, the loss is typically considered to be the\rsummation of the purchase price and the costs of labor and material used to put an\rasset into production, reduced by depreciation charges and insurance recoveries. With\rdigital assets, traditional loss valuation fails to refl ect the full loss to the company, as\rmuch of a digital asset ’ s value is based on intangibles. Here, the argument is made that\rwithout a full valuation of digital assets, managers do not know the true loss they have\rexperienced should the asset be lost. Consequently, optimal managerial decisions\rcannot be made. Real options analysis using binomial trees are suggested as a means\rto measure the full value of digital assets, and their resulting losses.