Use of derivatives as hedging instruments in Islamic finance

This article was publised in Express Tribune by Humayon Dar. There are many aurgements going on regarding the use of derivatives for hedging in Islamic finance. Not all are very conclusive and this article introduced the readers how the hedging works;

LONDON: Given the increasing importance of Islamic banking and finance in Pakistan, it is important to deepen the Islamic financial market in the country. One way of doing so is by developing a market for Islamic hedging instruments, which are known as derivative contracts in conventional finance. It is, however, important to understand the difference between Islamic derivatives and their conventional counterparts.

Financial engineering in Islamic banking and finance has resulted in a number of Islamic options, forward and futures contracts that may be used for risk management and hedging. It must, however, be emphasised that trading in options (rights to buy and sell), forwards and futures contracts is not permissible under Shariah

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