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Derivatives in Islamic Finance

Examining the Market Risk Management Framework

Sherif Ayoub

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An economic and legal analysis of derivative hedging instruments in Islamic finance

The Islamic finance industry faces the challenging task of attempting to reconcile the risk management demands of business entities with the difficulties posed by the seemingly rigid stance taken by some Shari'ah scholars over hedging practices.

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Contents

1. Introduction
2. Truth Formation in Mua’amalat
a. The Path to the Truth: The Role of Maslaha, Qiyas, and Igma’a
b. Truth-seeking in the Scripture: The Reality Imposed by Critical Rationalism and Hermeneutics
3. Market Risks and Their Management
a. Risk and its Management
b. Risk Identification
c. Risk Measurement
d. Risk Strategy
e. Rationale for Hedging
4. Conventional Derivatives: Theory and Practice
a. Economics of Derivatives
b. Conventional Derivative Instruments
5. Derivatives in Islamic Finance
a. Resolutions by Standard-setting Bodies in Islamic Jurisprudence
b. Theoretical Shari’a Issues
c. Contractual Shari’a Issues
d. Contemporary Derivatives in Islamic finance
6. Permissibility of the Underlying Variables and the Recognition of the Contract
a. Permissibility of the Underlying Variables: Interest Rate Benchmarks
b. Permissibility of the Underlying Variables: Currency Benchmarks
c. The Nature of Money in Islam
d. The Recognition of the Derivatives Contract
7. Maysir, Hedging, Derivatives
a. A Conceptualization of Maysir in Islamic and Western Thought
b. Maysir, Gharar, and the Indeterminacy of the Zero-sum Prohibition
c. Investment, Speculation, and Gambling: The Environment of Risk Management
d. The Role of Financial Intermediaries as Speculators
8. Conclusion and Ending Remarks.

About the Author

Sherif Ayoub works at Islamic Development Bank with an advisory responsibility over treasury, investments, and the development of the Islamic finance industry. He acquired his PhD from the University of Edinburgh having been previously educated at Columbia University and Baldwin Wallace University. He has also served as a Visiting Fellow at Harvard University and a Visiting Scholar at INCEIF and IFSB.

Reviews

Calculated risk-taking and preservation of wealth are two central pillars of Islamic economics and finance. Balancing the two while working within the global financial markets is a daunting challenge. Sherif Ayoub has done an excellent job of discussing and presenting a variety of views on these oft-competing dimensions. His book will significantly contribute to spurring a new wave of innovative market risk management techniques that conform to the body of rules within Shari’ah as well as having productive market utility.

- Adnan Ahmed Yousif, President and Chief Executive, Al Baraka Banking Group

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