Islamic Hedging: Gambling or Risk Management?
19 Pages Posted: 29 Aug 2008 Last revised: 18 Nov 2008
Date Written: August 27, 2008
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.
Keywords: Islamic hedging, derivatives, sharia-compliant
JEL Classification: G1, G13, G15, G3
Suggested Citation: Suggested Citation