Risk management Islamic Finance

Running Head: Risk management
Islamic Finance
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Table of Contents
Risk Management in Islamic Finance: Derivatives....................................................................3
How risk management is achieved through derivatives in Islamic finance...............................3
Derivatives.................................................................................................................................3
There are four derivatives used by Islamic Finance...............................................................3
Derivative Structure that makes Shariah Compliant..............................................................3
Reference list..............................................................................................................................5
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Risk Management in Islamic Finance: Derivatives
How risk management is achieved through derivatives in Islamic finance
Islamic Banks traditionally follows instruction and rules because of borrower bear risk in
investment and returns. Risk assessment tools and techniques can be evolved to eradicate this
risk (Khaliq et.al., 2017).
They understand the need of the people and provide them their desired product. It develops
Islamic law and Islamic economics. They follow bay' al-salam where people have to pay first
their products will be delivered later. If they innovate their financial management techniques,
it can contribute to the development of the Islamic banking system (Sakti et.al., 2016).
Derivatives
There are four derivatives used by Islamic Finance
Forwards- Forward is a contract between two parties for the transaction at a future date. In
this contract, features, measures, maturity is negotiated by two people. The terms are made at
initiation and transaction is made on the maturity date. With forward derivative, two parties
undertake a transaction that involves producers and consumers. In option, the bank evolves
economic mechanism where all issues are resolved.
Futures- Futures derivative is an exchange-traded forward contract. In Future derivatives,
futures contracts are introduced which gives benefit to both the parties. It improves liquidity
and reduces transaction costs.
Options- It provides the right to buy or sell an asset at a predetermined price. Call and puts
options that provide the right to them. Call give right of purchase and put gives right but not
obligation to sell.
Swaps- Swaps derivative are arrangements where swap transactions are made. It is the
process of exchange of an asset to another underlying asset.
Derivative Structure that makes Shariah Compliant
Derivatives were made for risk management of the Islamic Bank and to minimize risk. Bank
issue credit cards and no interest is involved (Said, 2017). They also provide safe custody
services to the clients. The derivative instrument and risk management are achieved through
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