Derivatives in Islamic Finance

Id is 18bb05033 today our team are going to be presenting on topic of derivatives in malaysia so these are the table of contents that we will be we will be covering the first introduction of derivatives and islamic derivatives in malaysia next the importance of function of derivatives in islamic finance categories or types of islamic derivatives in malaysia

Requisite for sharia complying derivatives viewpoints on conventional derivatives instrument issues or challenges in islamic derivatives and finally conclusion i am going to talk about the introduction on derivatives and islamic derivatives in malaysia so derivatives is a financial instrument that derives its value from the value of its underlying asset so simply

Derivatives means a contract that we buy and sell which is set today but will be fulfilled at a stipulated date later so islamic derivatives are mostly similar to the conventional uh derivatives the difference is islamic derivatives are free from gharar maiser riba so that if it follows the shariah rule and malaysia joined the derivative trading community with

The launch of cold palm oil features traded at the klce kuala lumpur commodity exchange in october 1980 the trading features regulated by the securities commission under the ministry of finance and cleared by the malaysia derivatives killing clearing house so after this my member will my member team will be talking about the function and other topics related

To this presentation next i will explain about the functions of the derivative in islamic finance are divided into three the first is referred the risk of management the price of the derivative is related to its underlying asset therefore it can be used uh to increase or decrease the risk of the earning the asset for the example a person named ali can reduce

His risk by buying sport items and selling feature a contract or the call options this is how these uh it works as if there is a drop in the spread price feature contract and subtable of the option will uh also fall ali can represses the contract at the lower price and will even make a profit this particularly upset the losses on the sport item this of the

Speculations in the derivative uh market also makes it easier for the investor who want to protect their expected positions in this part of the market secondly is about deteriorating market also surf has their important results of the information on the price price for the derivative instruments such as the forward and the future can be used to determine what

The market expects in the future so in the most case the information is uh oscar and unreliable therefore a forward and future markets are very helpful at the price of this discover of the mechanism the most likely problem with the forward contract is the risk of the opponent failing the risk of default individual contract does not arise much from the dishonest

Parties but from the increased incentive uh to default way to the subsequent price and movement typically the price of the future contract is reached uh about the middle agreement based on their negotiations this is problem uh inherit uh in this mechanism because with the imbalance between the burgundy positions of the boat parties there is a possibility that

The forward price will be forced by one uh party to another trending feature contract also solve the problems in their future contract which are likely to be a look look up at the unfair price with the large number of the market participants the price discover mechanism is perfected and a reasonable price oscar in their market thirdly about the operation for the

Derivative market also have a greater liquidity than this part of the market this means commissions and another transaction scores of the trader are lower in the derivative market furthermore unlike the securities market that do not uh encourage shortening short selling is easier in the derivative based on the risk of management short selling price discovery and

A bit of liquidity make derivative more efficiency in the market that’s all from me thank you smiling so i will present about type of islamic derivative uh in malaysia first is islamic fx forward iff islamic fx forward iff is based on what do the contract is writer dated and signed a document by one party promising to enter into an agri polish exam contract

With another at a specific uh date in future so basically what do is a unilateral promise or undertaking which are referred to an expression of commitment given by one party to another to perform certain action in future okay next is islamic swept islamic fx web islamic cross country swept and islamic profit rates web islamic profit rates were are mainly used

To avoid price change in the value of an asset and to avoid a market fluctuation in the rate of exchange these are the agreement to exchange profit rates between fixed rate and floating rate financial transaction and require a trade of asset in the underlying contract to comply with islamic principle next is islamic forage at ching swap here after islamic fx

Web is a contract that is designed as a hedging mechanism to minimize market participants exposure to market currency series which is a volatile and fluctuating okay next is islamic option islamic option is an option is a contract that gives buyer the right but not the obligation to purchase or to sell the specific quantity of an asset for a set price at the

Specific date in the future okay in addition uh uh for this ride the buyer pays a price known as a premium to the seller okay and uh islamic islamic option has two type which is put option and call option put option is uh give the buyer right to sell the asset by a certain date in the future for a specific price and call option is give the buyer the right to buy

The asset by a certain date for a specific price and lastly is the future contract future contract is defined as a legally binding commitment to deliver at a future date or take delivery of a given quantity of a commodity or a financial instrument at an agri price uh it has a firm legal agreement between a buyer or sailor and an established community exchange

In which the trader agreed to deliver or accept libre during a design period of a specific amount of a certain community assalamu alaikum my name 18 is today i will explain about leukocyte for sharia compliant derivative so our financial instrument generally must meet some certain criteria in order to be considered as halal or permissible so financial instrument

And transaction must be free at least these five arguments firstly it’s reebok river means increase or additional to anything or commonly known as charging in interest secondly secondly is myself which is gambling my fear means unnecessary wish is great by entering into transaction we hope to gain something or we are known as gambling at least means unnecessary

Risk deception or internationally induced to an uncertainty means foreign give something or given something in order to influence the decision of individual lastly is joel or ignorance from financial transaction viewpoint the contraction is unacceptable if one party goes ignorance there are several muammar contracts that have feature resemble directive and can

Be used for hedging just as salaam and is this not that are used to create products which have features similar to forward future option and swap are community muraba musa has some basic condition regarding to the sale of an asset according to the shariah the sale will be valid if first the community or underlying asset must be currently added in its physical

Server form secondly the seller should have legal ownership of the asset of its final form so this condition are acceptable for your asset as opposed to financial asset this condition for the ability of cell to make directive trading impossible however sharia provides an exception to this general principle to allow for different cells if required my name is

And my metric number is on 8 vb05018 now i will talk about foca julie’s viewpoint on conventional derivative instrument risk exists in business and finance investors around the world use a very deep risk reduction tools and instruments including derivative instruments such as future contract after examining the evolution of derivative instrument they are used

And played in this market islamic school review some of the islamic relieving islamic literature and attempt to outline islamic states on modern future and option many schools argue that future contracts are justified while rejecting the argument given against their inability while others accuse that the contemporary business environment demand to use them

Here are the few of two types in the derivative market this is the point of view of future there is a similar contradiction in the argument based on the validity of a future contract the writing of theta clause money or fake academic data mentioned in the federal article that modern future contracts are not valid for two reasons which is all forward and future

Transactions are not valid in sharia due to well-known sharia principle the sale or purchases cannot be executed for the future day besides most community future delivery or the ownership are not intended in most cases the transaction ends with the settlement of the price difference only which is not allowed in shariah in opposing islamic future market based on

Bank assad this foreign finance was looked at the conventional market roof lead he harsh critique of modern future contract in that they must exploit small hormones for having given the wrong sickness that is the future market because completely free and separate from the cash market which tend to give the wrong signal to the farmer and farmer was not becoming

A player or future method because they have to compete with professional speculative they may eventually be exploited by the wrong signal second is lieu of options surveyors could have found that such options are unpleasant each of the school object for the different reason high yielding has sent object on two reasons which is that the maturity exceed three

Day according to the contract option is not acceptable next option buyer are given far more benefit than the seller because and this is operation and injustice abuse lineman found an acceptable option when viewed on the basis of buying and urban but conclude that the option should be prohibited as he assumed the option will be missed and does not depends on

The underlying asset and therefore it is not a profit appropriate for the seller to be charged a premium but other schools have been buying an urban transaction because urban is trying transaction in which the buyer placed the initial good will deposit with the seller but if the buyer decide not to proceed with the transaction the payment adjusts for the initial

Deposit is not refundable hello alaikum my name is mail my metric number 18 bb05037 along with the growth of derivative they are not excluding from the arrival of issues until now many issues regarding the validity of derivative has have been debating among jurists and mostly the issues are relating to sharia issues so in this video i will explain three sharia

Issues which is relating to carver speculations and gambling so the first sharia issue is regarding galval many scholars reject derivative because they claim that it contains the element of kara basically they claim two issues which is relating to by ma doom and that jill vadalin so the first one is by matt dom it is referring to conducting a transaction or

Contract with non-existent product so as we already know contract with non-existent product is haram in islam however ssc has rejected this issue by stating that either by matthew or element only occur if the transaction is if the parties is unable to transfer the asset and it is not happen in derivative next girl issue is relating to tajil which is about the

Postponement of delivery of goods and payments so many claims that it contains the element of garage however according to the jurors who rejected this issue they claimed that derivative market may still contain the element of girl but in a minimum amount since a derivative market is an organized market so they can reduce the water element so since yasir is

Acceptable in islam so this issue still causes a disagreement among jurists next is speculative that being linked to assembling a gambling so speculations uh happens when a party involved in a contract and does not have the intention to take over or on a physical assets and so speculators are getting profits by the price changes in the market so jurists like al

Satay claimed that speculation activity only depends on fat however ssc and muhammad on the other hand rejecting the issue since it not clearly contain the element of fraud and manipulations however ssc suggests that the market should be controlled to avoid injustice next issue is either or not the derivative contain the element of camping so some scholars

Claim that the initial margin that being paid in the beginning of contract as a betting by the parties however muhammad doubt rejecting this issue and claim by stipulating that the initial margin play a role as a security issue like a collateral in arahan contract next islamic fig academy classified some derivative with underlying assets like share index as a

Gambling however ssc uh not agree with the decisions since an index has its own value and can increase or decrease according to the demand of its underlying asset finally for the conclusion the derivative assists the investors traders and managers of large pools of funds to devise such strategies so that they make proper asset allocation to increase their wealth

And yields by achieving other investment goals and islamic derivatives allowed muslims around the world to safeguard the investment using sharia principle rule by avoiding issues arising due to scholars views on the matters of governor and others that includes in the conventional derivatives that’s all from us thank you

Transcribed from video
Derivatives in Islamic Finance By Hafizuddin Nabees Khan