Hedging in Islamic Finance

The last decade witnessed an increasing trend in markets’ volatilities and financial crises. During the same period, derivatives, the most common instruments for hedging, have been growing at an exponential rate. Apparently, derivatives did not help stabilize markets and attenuate financial crises. This is not difficult to explain, since derivatives are also the main instruments for speculation. More than 97% of derivatives users are speculators, while less than 3% are hedgers. The challenge therefore is to search for instruments that allow for productive risk management without harmful speculation. This is the theme of Islamic finance that the paper explores. Based on Shari’ah rules of gharar, the paper therefore suggests several instruments for managing and hedging risks associated with Islamic modes of finance._x000D_ _x000D_ Topics: i) Introduction. ii) State of Risk: Volatilities of Selected Financial Markets. iii) Derivatives. iv) An Islamic Approach to Risk. v) Theory of Ghara