Islamic Hedging: Gambling or Risk Management?
Universiti Teknologi MARA, Malaysia
Universiti Teknologi Malaysia (UTM)
August 27, 2008
Islamic Law and Law of the Muslim World Paper No. 08-47
21st Australasian Finance and Banking Conference 2008 Paper
Although there is a lack of consensus regarding derivatives and the development of sharia-compliant funds to mimic hedge funds in order to tap the global surplus liquidity especially the Gulf petrodollar, sharia scholars are generally agreeable that hedging is permissible and necessary as a risk management tool. However, there is still considerable debate regarding the kind of instruments that could be sharia-compliant. This paper looks at the main forms of hedging and examines the debate surrounding the use of derivatives in Islamic financial markets. The paper then looks at alternatives for sharia-compliant hedging mechanisms and in particular examines an Islamic financial derivative of Bai Salam that can mimic a short sale in a conventional option, but with potential for becoming a more superior risk management tool.
Number of Pages in PDF File: 19
Keywords: Islamic hedging, derivatives, sharia-compliant
JEL Classification: G1, G13, G15, G3
Date posted: August 29, 2008 ; Last revised: November 18, 2008