Options Market as a Tool for Covering Commodity Price Risk in Banks' Salaf Facilities
As financial institutions which act as intermediaries to finance and allocate financial resources, banks have to deal with various risks, including operational risk, credit risk, market risk, and some other types of risks. Since annihilating risk from economic activities is almost impossible, banks aim at managing and reducing risk. Banks exploit various methods to manage and reduce various types of risks involved. For instance, in order to manage credit risk, banks require clients to provide collateral.
One of the risks that Islamic banks encounter is the price risk of commodities involved in salaf facilities. In order to manage and reduce the price risk of the commodities involved in such facilities, banks can exploit the potentials resulting from the capital market. One of the potentials of options is that they can be used in Islamic banking for managing and reducing commodity price risk.
This descriptive-analytical study was carried out using library resources. It aimed at verifying this hypothesis: “Financial derivatives such as options can assist Islamic banking in managing and reducing the commodity price risk involved in salaf facilities.” In fact, exploiting the capacities made possible through Islamic banking in the capital market not only helps in managing and decreasing the risk of Islamic banking, but also increases the depth of capital market. This increase is resulted from banks participation in this market.
Islamic Economics & Banking, Volume:7 Issue:25, 2019
123 - 143
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