An Economic Welfare Preserving Framework for Spot Pricing and Hedging of Spectrum Rights for Cognitive Radio

In a Cognitive Radio (CR) enabled network, Secondary Users (SUs) have an impact on the Quality-of-Service (QoS), and ultimately the revenue of the PU Primary User (PU) license holders. An important metric of an investor's economic welfare is the ratio of mean returns to the volatility of returns (Sharpe ratio). Numerous CR access schemes have been proposed that fail to account for the economic welfare of PUs when SUs access their spectrum. In this paper we consider the PU's spectrum license as an investment and analyze the impact of CR activity on the PU's economic welfare, in order to derive a cost of production of spectrum access rights such that the PU's economic welfare is not degraded. This creates an incentive for PUs to permit CR access in their spectrum bands, by ensuring that the characteristics of returns on the substantial investment made in spectrum licenses are preserved. However, under any instantaneous or spot pricing scheme, the risk of price volatility is introduced. We also propose a framework to alleviate the risk to SUs from a volatile CR rights spot price, by introducing the concept of forward pricing and hedging of CR rights. This reduces the variability of cash-flow associated with the purchase of CR rights, ensuring that the QoS provided by an SU network remains unaffected by a high CR access price. We also illustrate the leverage effect, where a PU will achieve a higher mean return- on-investment with SU operation, albeit with a higher variance of returns.