Derivatives as risk management tool and its legitimacy Done by Saidakhon Akhmendova

Derivatives as risk management tool and its legitimacy

Done by

Saidakhon Akhmendova

Outline:

• Derivative and its types
• Risks transferred by Derivatives
• Risks associated with Derivatives
• Question of legality
• Outcomes

A derivative is a financial tool, which derives its value from another financial asset, event or commodity called underlying asset. Such financial contract is concluded to trade or redistribute the risks used to hedge it or to acquire the risk and make profit out of it.

— Parliament of UK

Types of derivatives:

• Futures
• Forwards
• Swaps
• Options: call option/put option

Hedged Risks

• Risks in Project Finance: credit default risk, currency risk, which is associated with not only block of certain currency or restricted converting, but also obtaining loan in another currency, return from sale of products or providing services, volatility of exchange rate.
• Sonangol, Angola’s national oil company case
• Crude oil
• Put option
• Operational risk vs. Systematic risk
• Manipulation
• Lack of transparency
• Counterparty Risk

Derivative Risk

Legality of Derivatives

Conventional law

• Unenforceability of Future Contracts
• Absence of consideration
• Netting off the difference in price
• Speculation

Shariah law

• Riba (interest) and gharar (uncertainty) and qimar (gambling)
• Paper transaction without subject matter, to title, no possession and speculative
• Index involved transactions as gambling

Outcomes

1. Transfer or trade the unwanted risk to the party willing to bear that risk

2. Intention and will

3. Gambling is about creating non-existing risk

4. Derivatives do not produce risks, but hedge existing risks

Thank you for attention!