ISLAMIC DERIVATIVES

     Islamic derivatives are a relatively new structure in Islamic banking. This is mostly due to Islamic derivatives products' limited use as a hedging technique. Islamic derivatives are defined in Section 2 of the Malaysian Islamic Financial Services Act (IFSA) 2013 as "any agreement, including an option, a swap, futures, or forward contract, made in accordance with Shariah, whose market price, value, delivery, or payment obligations is derived from, referred to, or based on, but not limited to, Islamic securities, commodities, assets, rates including profit rate or exchange rates, or indifference rates." The structure, on the other hand, must be approved and Shariah-compliant, and the underlying asset must be a permissible item.

Islamic Capital Instruments	Islamic Derivatives
Definition	Any agreement, including an option, a swap, futures, or forward contract, is made in accordance with Shariah.
Purpose	Offered to counterparties by Islamic Bank for the objectives of risk management and hedging.
Characteristics and Features	Type of Islamic capital market instrument or financial product that aims to have a similar economic profile to conventional derivatives, but with a Shari'a-compliant structure.
Types	1)     Islamic FX forwards (IFF) 2)     Islamic swaps 3)     Islamic cross-currency swaps (ICCS) 4)     Islamic profit rate swaps (PRS)
Shariah Contracts /Elements	- Wa'd - Tawarruq - Commodity  - Murabahah, - Musawamah - Bay'bi Thaman äjil - Bay'al-'inah
Example	Standard Chartered and Bank Islam Lead The Way Syariah - compliment derivatives will allow investors to hedge against interest rates and commodity prices. Contracts will provide protection from fluctuations in the cost of items such as rice and oil. The market will be limited to hedging after derivatives contributed to the global financial crisis.

    

    In terms of the purpose of Islamic derivatives, they are exclusively offered to counterparties by Islamic Bank for the objectives of risk management and hedging. Furthermore, concerns with sharia compliance of derivatives, as well as a lack of standardization and harmonization of existing hedging tools across jurisdictions, are limiting the growth of the Islamic derivatives market.

    

    There are a few Islamic derivatives now in use including Islamic FX forwards (IFF), Islamic swaps (including Islamic FX swaps, Islamic cross-currency swaps (ICCS), Islamic profit rate swaps (PRS), Islamic options, and a few Shari'ah-compliant futures contracts. Derivatives are used in a number of common Shariah-compliant finance schemes. The Shari'ah contracts or ideas of wa'd, tawarruq, commodity murabahah, musawamah, bay'bi Thaman äjil, and bay'al-'inah are used in Islamic derivatives.

    

    Islamic derivatives are currently available that closely mirror conventional forwards, futures, options, and swaps. All financial instruments and transactions must be free of at least five elements according to Sharia elements which are riba (interest, rishwah (corruption), maisir (gambling), gharar (unnecessary risk), and jahl (unwanted danger) (ignorance). In the context of derivative instruments, interest restrictions and bans on incurring "unnecessary" risks become especially essential.