The purpose of this paper is to examine the dynamics of the derivatives of the global financial community. Aderivative type, origin and reason of its use are some questions to consider that the Western financial system much more powerful than any other single financial system will be worldwide. It is interesting to note that Islamic finance does not allow unlimited use of financial derivatives in its own legal system. Islamic finance refers to the methods of the banking company and financial, that are consistent with the principles of Islamic law.
Islam commands authority over the whole character of a Muslim, not the assumption of a distinction between the sacred and the profane. Economic, political, religious and social, including finance, fall under the jurisdiction of the divine law of Islam, the Sharia. On the basis of Sharia, Islam has broad ethical standards that must be run as businesses and the economy are formulated and how the banking and finance is to be arranged. This is why, in part, why Islam in the West, are poorly understood.
There are two main aspects characterize the relationship between Islam and finance. One is that Islamic law, all aspects of life, social ethics and the regulation says. Every act of the faithful must comply with Islamic law and respect the ethical norms of Islamic principles derived. These ethical principles define fairness and justice, the nature of business and corporate responsibility, and business priorities. Second, in addition to planning a number of business ethics, certain economic and financial principles of Islam in the Holy Quran. These include, in particular the prohibition of Riba and the institution of a free economic system of interest. The article will appear above all to the differences between conventional financial derivatives and Islamic financial instruments, valuation of these to discover religiously acceptable.
Derivatives is a generic name for legally binding agreements, the value of an underlying value, is a financial instrument or reference purposes fundamental rate.The resulting from the transfer, which is a variable factor, such as price of a commodity or an exchange of currency from one party to another, the. unwilling or unable to accept the risk seems that the long-term derivatives only gained widespread use in the early 1980: "A U.S. court of the first term in 1982, but has not reported any British decision to appear 1995.Despite the extensive press coverage, is still derived Perhaps the most difficult to understand financial terms. This is partly due to refrain from the wide range of financial derivatives in the games and also to the complex nature of instruments. An unfortunate perception among many that a derivative is not that the loss caused to an investor. derivatives should be seen by some as "esoteric", "Arcane" and understand a subject that has been described only by "scientists rockets. "It is true that complex derivative instruments contracted state, are not conceptually incomprehensible. But to quantify the market risk of derivatives or understanding of how they are priced requires advanced knowledge of mathematics.
Several industry groups and regulators have developed their own working definitions of the terms of the derivatives, which provide useful information about the area covered by financial instruments. A derivative can be used as a financial instrument whose value depends on something else, like a physical product (eg, wool, cattle, oil or gold), a financial asset can be defined (such as stocks or bonds) that derived from an index (z. as a stock index), interest rate, currency, another derivative. [1] In addition, transactions in derivatives can be used as a bilateral contract or payments exchange agreement whose value is to be understood, as the name suggests, the value of an underlying asset or underlying reference rate or index. Moreover, derivatives are bilateral contracts, which developed the exchange of cash deficiencies and to change the risk between the parties. When mature transactions, amounts due from each party are determined by the prices of underlying commodities, securities or indexes.
A derivative contract with an element at the front leads to symmetric obligations because a contractor has to buy and sell the other party should be the base or instrument at a specified price on an agreed date in the future. On the other hand, is a futures contract with an option element to make the required asymmetric, because the option holder is not required by law to exercise the option. It's just the writer of the option it has to offer or accept the underlying asset or instrument.
Derivatives are contracts that give only the rights and obligations to carry out a variety of forms such as the cash settlement and delivery or transfer of rights to the underlying interests. In general, derivatives can not even grant or transfer of the underlying interest of which they are derived. However, for some derivatives, raises the right to transfer the underlying interest at the end of the contract. Business partners who are in over-the-counter derivatives transactions generally selected based on their creditworthiness.
It has been suggested that the market value of derivatives that are derived not only the market price of the underlying asset but also the strength of the promisor is able to perform. [1] The agreement of both parties is usually required before the transfer of interests or contractual rights to another party. Most of the documentation of the market in use today include a transfer clause in this regard. [2]
It has expanded considerable effort during the past two decades, the variety of products in the Islamic financial markets. This was driven by a number of forces, especially the growth of free cash flow for investment is Islamically acceptable, the size of this group is estimated at least $ 50-100000000000 and steadily. These funds come from a small but growing number of Muslim-run businesses, as well as regular users of capital seeking a reduction in resources and are willing to make the necessary efforts to deal with the structuring and documentation, put funding mechanisms sought religiously acceptable.
A central concern for all, which is testing the understanding of Islamic finance that affect how the religious rules of Islam, the operations of a business in today's business environment. Even when an industry operates in a different set of religious (or other) costraints, is able, with reasonable efficiency economic basic needs of business enterprises and investors to provide their financial needs. These rules do not mean me a copy of the conventional financial arrangements, but there are certain financial transactions and guarantees that must be met by any company or investor.
Salam, istisna ',' Arbun, third party guarantees, and al-shart khiyar are important religiously acceptable Islamic financial contracts that can serve as substitutes for a portion of the derivative securities now commonly used in conventional financial markets. Derivative financial instruments such as forwards, futures, options, and have become standard tools for risk management in Western developed financial markets and emerging markets in Asia, Eastern Europe and Latin America.
In a Salam contract, the purchaser shall pay immediately of any product or any other reasonable cause, the Seller shall deliver to a given date in the future. For example, a milling company to buy the other party a certain number of bushels of wheat to be delivered at a certain price per bushel to six months. The transaction is final when the money is exchanged, but the seller usually does not have the promised wheat at this point. The seller can buy the wheat at the current price at any time before the date for future delivery or can grow themselves.
A Istisna contract 'includes the purchase of a commodity will move forward to certain specifications, prepared as a characteristic of a reasonable product, generic for a contract against Salam. [1], the payment by the buyer often refers to the seller (eg the manufacturer) in installments as progress is made in the production of well-done. "Examples include a department store ordering the production of a thousand pairs of jeans in blue and is committed to making a lump sum payment to the agent for delivery or shipment of a cargo ship new and regular installments , in the yard which moves forward construction [2].
The istisna'contract is like a forward contract has changed to a partial payment. So it's a fair contract in the traditional sense, ex-ante payment of the contract must be zero for both parties have the structure of the yield curve today. However, it should be with defining what is a fair contract in the Islamic context, be careful. The seller is a istisna'contract in an Islamic order, as a rule at all, except with the advance payment used for the production of goods. Can not be used for the protection and market other purposes, such as investments in other products. Moreover, since the elements are adapted, the seller can not adequately protect (get a risk-free contract) by holding an offsetting transaction in another contract. [1]
The contract of a Arbun 'gives the buyer an immediate payment of part of a well and agrees to pay the balance or at a particular point in the future when it takes delivery of the commodity, or forfeit the deposit and walk away the contract (perhaps because in the meantime found a better deal elsewhere). [1], the seller must be able, good overcomes deliver cost until the contract causes a considerable opportunity cost of capital, which tied in well.
The guarantee of a third party is a contract to another. While Islamic law prohibits guarantees often among parties to the transaction, usually allows a guarantee of a third party can do, and many Islamic contracts contain such guarantees. This guarantee, for example, relieve one or the other direct contract with the process is often tedious and expensive to obtain and evaluate information on the credit of another person (this can be done efficiently by a bank or other agents with experience in the rule). To compensate the guarantor usually receives a fee and a lien on the property in the contract. As can be charged under Islamic law guaranteed only for administrative expenses (not capital costs), guarantees are often given by a third party in a transaction without a sponsorship fee interest. [1] The nearest equivalent to a purchase option in the Islamic financial system is Arbun "contract, while the Islamic equivalent of a put option is the guarantee of a third party.
Journal of International Banking Law and Regulation
[1] F.E. BIRD - S.L. Hayes, Islamic Law and Finance, cit., P. 221st
[1] See L. ANGELO ROSA, after Mecca of San Francisco: the harmonization of Shariah-compliant contractual remedies under California law, 6 UC Davis Bus. L.J. 108, 117 (2005).
[1] F.E. BIRD - S.L. Hayes, Islamic Law and Finance, cit, pp. 224 -. 225th
[1] See BABBACK Sabahi, Islamic financial structures as an alternative to international lending contracts: Challenges for U.S. financial institutions, 24 Ann. Banking and Fin L. Rev. 487, 496 (2005).
[2] F.E. BIRD - S.L. Hayes, Islamic Law and Finance, cit., 224th P. See M.A. El-Gamal, Islamic finance. Law, business practices and above pp, 90 -. 91st
[1] e.g. SWAN - C. McKenna, The problem of understanding derivatives cit. Page 16
[2] Ibid.
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