The ethical framework governing Islamic Finance prohibits interest, but also gambling and speculation. Within this framework money is not seen as a store of value, but solely as a means of exchange, which results in the fact that Islamic Banks are mainly applying structures in which the underlying assets or projects are financed and they basically do not just provide money to their clients.
The Islamic financial industry is young, but developing at a fairly rapid pace and individual transaction sizes are increasing, which in turn results in a requirement for more and more complex structures. However, the prohibitions the banks are facing are also the main cause of their restrictions in the application of hedging instruments such as futures, options and other derivative products. Although hedging as a risk mitigant is permitted, the speculative nature of most of these products is a hurdle for their use. This article explores why traditional futures and options are not available to Islamic banks and explains the alternatives that are.
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