Islamic Hedging: Gambling or Risk Management?

19 Pages Posted: 29 Aug 2008 Last revised: 18 Nov 2008

Saadiah Mohamad

Universiti Teknologi MARA, Malaysia

Ali Tabatabaei

Universiti Teknologi MARA (UiTM)

Date Written: August 27, 2008

Abstract

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

Mohamad, Saadiah and Tabatabaei, Ali, Islamic Hedging: Gambling or Risk Management? (August 27, 2008). Islamic Law and Law of the Muslim World Paper No. 08-47; 21st Australasian Finance and Banking Conference 2008 Paper. Available at SSRN: https://ssrn.com/abstract=1260110 or http://dx.doi.org/10.2139/ssrn.1260110

Saadiah Mohamad (Contact Author)

Universiti Teknologi MARA, Malaysia ( email )

40450 Shah Alam
Johor
Dungun, MA Selangor 23000
Malaysia
+6013 346 4310 (Phone)
+603 5521 1442 (Fax)

Ali Tabatabaei

Universiti Teknologi MARA (UiTM) ( email )

40450 Shah Alam
Johor
Dungun, MA Selangor 23000
Malaysia

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