Author(s): Sumit Kumar
Credit Derivatives are primarily a hedging instrument but at times is used as leverage seeking instrument. Because of its opacity in calculations and business protocols, It is not usually an investment an ordinary investor/ hedger can do. Therefore, they go to Investment Banks for their expert advice services. These big Investment Banks have more information in this business than these ordinary investors. It creates a kind of information asymmetry and an information bias towards these banks, who, at not acting in good faith, try to monetize this situation by not act in fairly. This creates moral hazards and issues in business ethics. Current work tries to highlight one such scenario related to the CDS Index option depicting a future possible case of unethical transactions between a Bank and its Client with whom banks owe a fiduciary responsibility. This works us distributed in 5 sections with Introduction, Literature Survey, a case analysis of CDS Index Option, and synthesis of a theoretical framework of Business Ethics > present work is ended with concluding remarks and possibilities for future research. Widely accepted Option Pay off methodology has been used to generate a simulated pay off of CDS Index Option and tried to create a stressed Market condition to simulate the scenario in which this unethical business practice might occur. Credit Crisis data has been used as a baseline for the spread simulation purpose.