Religion, Ethics and Stock Trading: The Case of an Islamic Equities Market

Islamic banking, based on the prohibition of interest, is well established throughout the Muslim world. Attention has now turned towards applying Islamic principles in equity markets. The search for alternatives to Western style markets has been given added impetus in Muslim countries by the turmoil in Asian financial markets in 1997. Common stocks are a legitimate form of instrument in Islam, but many of the practices associated with stock trading are not. In this paper the instruments traded and the structure and practices of stock markets are examined from an Islamic perspective. Speculation is not acceptable in Islam and measures would have to be taken to control speculative trading. In addition short selling and margin trading are severely restricted. The use of stock index and equity futures and options are also unlikely to be acceptable within an Islamic market. Regulatory authorities in Muslim countries will therefore find a vast array of problems in attempting to structure a trading system that will be acceptable.     

Crypto quanto and inverse options

Over 90% of exchange trading on crypto options has always been on the Deribit platform. This centralized crypto exchange only lists inverse products because they do not accept fiat currency. Likewise, other major crypto options platforms only list crypto–stablecoin trading pairs in so-called direct options, which are similar to the standard crypto options listed by the CME except the US dollar is replaced by a stablecoin version. Until now a clear mathematical exposition of these products has been lacking. We discuss the sources of market incompleteness in direct and inverse options and compare their pricing and hedging characteristics. Then we discuss the useful applications of currency protected “quanto” direct and inverse options for fiat-based traders and describe their pricing and hedging characteristics, all in the Black–Scholes setting.     

Islamic legal methodologies and Shariah screening standards: Application in the Indonesian stock market

This article provides a framework for applying the principles of Islamic legal methodology to determine the optimal Shariah screening standards for Islamic equity markets. It is argued that using maslahah mursalah (unrestricted benefit) is an appropriate method for identifying appropriate financial standards and its principles stipulate that the benchmark that yields the best economic returns to investors should be chosen. The methodological framework is applied to the Indonesia equity market where the economic implications of the Islamic stock screening standards of the Indonesian Islamic Shariah Stock Index and four global indices are assessed. Portfolios are constructed by applying Islamic stock screening standards for each of the indices by using data on 377 stocks listed in the Indonesian stock market for 5 years. The performances measured by the Sharpe ratio, Treynor index, and Jensen alpha reveal that the Dow Jones Islamic Index screening criteria performs the best. Based on the method of maslahah mursalah, the article recommends using the screening standard of this index in the Indonesian stock market to maximize benefits to investors. While the approach used in this article is applied to Islamic equity markets, the methodological framework can also be used for other similar cases in Islamic finance.     

Is volatility risk priced in the KOSPI 200 index options market?

The negative volatility risk premium is understood as a result for a hedging demand against market declines. Although this negative volatility risk premium is observed in most index options markets, there are some doubts about its presence in the KOSPI 200 index options market. The majority of KOSPI 200 index option holders do not possess any position in the underlying market; the composition of trading groups of the KOSPI 200 index options significantly differs from that of its underlying index; in this circumstance, the presence of a hedging demand is questionable. This study shows that volatility risk does not require a premium in the KOSPI 200 index options market. Rather, jump fears influence KOSPI 200 options. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:797–825, 2009     

Ethical Reasoning and the Use of Insider Information in Stock Trading

The cognitive developmental theory of ethics suggests that there is a positive relationship between ethical reasoning and ethical behavior. In this study, we trained a sample of accounting and finance students in performing competitive stock trading in our state-of-the-art trading room. The subjects then performed trading of stocks under two experimental conditions: insider information, and no-insider information where significant performance-based financial awards were at stake. We also administered the Defining Issues Test (DIT). Ethical behavior, as the dependent variable was measured in a binary scale: whether the subjects used insider information for trading of stocks or not. Ethical reasoning as measured by the DIT P-score indicated statistically significant effect on ethical behavior. The results have important implications for recruitment and training of professionals engaged in the use of financial markets for securities trading.     

The Demand for Hedging with Futures and Options

The optimal hedging portfolio is shown to include both futures and options under a variety of circumstances when the marginal cost of hedging is nonzero. Futures and options are treated as substitute goods, and the properties of the resulting hedging demand system are explained. The overall optimal hedge ratio is shown to increase when the marginal cost of trading options is reduced. The overall optimal hedge ratio is shown to decrease when the marginal cost of trading futures is decreased. One implication is that hedging demand can be stimulated by a reduction in the perceived cost of trading options through the education of hedgers about options and the initiation of programs such as the Dairy Options Pilot Program. The demand approach is applied to estimate optimal hedge ratios for dairy producers hedging corn inputs in five regions of Pennsylvania. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:693–712, 2001     

Religion and the Clash of “Ideals” and “Realities” in Business: The Case of Islamic Bonds (Sukuk)

Fueled by an increasing demand for investments that comply with Shariah (Islamic law), sukuk (Islamic investment certificates or participation certificates) have developed as one of the main components of the Islamic finance industry. In general, sukuk can be structured as asset based or asset backed, yielding wholly different risk profiles in the event of default and liquidation. However, given that the sukuk market is dominated by asset‐based sukuk, this article examines the motivation for greater interest in this specific sukuk structure. It also analyzes the challenges facing the regulatory framework and tax implemented for Islamic securitization in various jurisdictions. Then, it further evaluates, from the perspective of credit rating agencies, the importance of purchase undertakings in the structure and some controversies on this very point. The main issue that emerges is the difficulty of resolving the clash between the ideals of Islam and the realities of the marketplace. © 2015 Wiley Periodicals, Inc.     

INTERNATIONAL PRODUCTION,INVESTMENT AND BORROWING WITH EXCHANGE RATE RISK AND FUTURES MARKETS

In this paper we consider a multinational firm under exchange rate and interest rate risks in a multiperiod model. We analyze the impact of exchange rate uncertainty and the use of currency futures on the risk-averse firm's decisions about home and foreign production. Without any hedging markets exchange rate risk lowers foreign investment and output. However, when futures markets exist, the separation property holds. Introducing another source of uncertainty, such as the interest rate, which is nondiversifiable, affects the production in both countries, i.e., the separation property does not hold. However, we show that the adverse effect of the missing financial market (to hedge against this additional risk) disappears when international borrowing is available.     

Delivery risk and the hedging role of options

Multiple delivery specifications exist on nearly all commodity futures contracts. Sellers typically are allowed to deliver any of several grades of the underlying commodity and at any of several locations. On the delivery day, the futures price as such needs not converge to the spot price of the par‐delivery grade at the par‐delivery location, thereby imposing an additional delivery risk on hedgers. This article derives the optimal hedging strategy for a risk‐averse hedger in the presence of delivery risk. In particular, it is shown that the hedger optimally uses options on futures for hedging purposes. This article provides a rationale for the hedging role of options when futures markets allow for multiple delivery specifications. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:339–354, 2002     

New and future research in corporate finance and governance in China and emerging markets

This paper briefly surveys the literature on finance, growth, and policy in China and emerging markets. We introduce the papers that comprise this special issue of Emerging Markets Review. The papers comprise themes in corporate social responsibility, innovation, insider trading, financial reporting behaviours, and financial openness. Also, we discuss research trends and offer suggestions for future research on corporate governance and finance in China and emerging markets.     

Islamic economics and Islamic finance in the world economy

This paper places the articles in this special issue in the contexts of Islamic economics and finance research. It highlights the foundations of Islamic economics, which are in practice manifested in Islamic finance. Then, the paper brings up three key issues in Islamic finance today – the Islamicity of Islamic banking, real contributions of Islamic finance, and Islamic finance in the present monetary framework. While there are some promising theoretical and empirical findings pointing to positive contributions of Islamic finance, there is still a need for Islamic finance to distinguish itself from the conventional finance and to further demonstrate its real effect.     

Futures hedging using dynamic models of the variance/covariance structure

Dynamic futures‐hedging ratios are estimated across seven markets using generalized models of the variance/covariance structure. The hedging performances of the resultant dynamic strategies are then compared with static and naïve strategies, both in‐ and out‐of‐sample. Bayesian‐adjusted hedge ratios also are employed as error purgers. The empirical results indicate that the generalized dynamic models are well specified and that their use in determining optimal hedge ratios can lead to improvements in hedging performance as measured by the volatilities of the returns on the optimally hedged position. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:241–260, 2003     

OPTIMAL STATIC–DYNAMIC HEDGES FOR BARRIER OPTIONS

We study optimal hedging of barrier options, using a combination of a static position in vanilla options and dynamic trading of the underlying asset. The problem reduces to computing the Fenchel–Legendre transform of the utility-indifference price as a function of the number of vanilla options used to hedge. Using the well-known duality between exponential utility and relative entropy, we provide a new characterization of the indifference price in terms of the minimal entropy measure, and give conditions guaranteeing differentiability and strict convexity in the hedging quantity, and hence a unique solution to the hedging problem. We discuss computational approaches within the context of Markovian stochastic volatility models.     

The impact of net buying pressure on index options prices

This study examines whether the demand for options, as measured by the net buying pressure of index options, explains the implied volatility structure created by options prices. We decompose the buying pressure into the direction‐motivated (i.e., delta‐informed) and the volatility‐motivated (i.e., vega‐informed) demand for options. After controlling for options traders' hedging demand, we find that both delta‐ and vega‐informed trading play significant roles in explaining changes in implied volatility. Foreign institutions are more directionally informed in index options trading than their domestic counterparts are. Domestic investors effectively implement volatility trading using put options.     

Investor protection and dividend policy: The case of Islamic and conventional banks

This study examines the dividend policy behavior of Islamic and conventional banks operating in Arab markets. These banks operate in an environment of Sharia law and low levels of investor protection. Our results support the substitution agency model of dividends for Islamic banks, and Islamic banks use the dividend policy as a substitute mechanism for alleviating relatively more significant agency problems and higher risks of expropriation by insiders. In these markets, conventional banks operate in a more competitive environment and experience relatively less significant agency problems. In contrast to Islamic banks, conventional banks follow the outcome agency model of dividends.     

Western Financial Agents and Islamic Ethics

This paper investigates Western professional bankers’ perceptions of Islamic finance. Exploiting data from an original survey, we carry out a principal component analysis (PCA) to characterize the main dimensions on which financial agents diverge. The PCA extracts five dimensions—accounting for 61 % of the variance in the agents’ answers—that we interpret with the help of a pilot field survey. In addition to confirm the increased association of Islamic financial values with ethical practices in the West, our results allow us to understand how the observed growth of the industry has been conceptualized by conventional agents. The five dimensions identified shed light on the multitude of constructs that have informed the diffusion of Islamic financial ideas to international markets. This supports the fact that Islamic finance cannot be seen as a single movement but is characterized by opposing and concurrent logics in global markets.     

Hedging in Futures and Options Markets with Basis Risk

This paper analyzes the hedging decisions for firms facing price and basis risk. Two conditions assumed in most models on optimal hedging are relaxed. Hence, (i) the spot price is not necessarily linear in both the settlement price and the basis risk and (ii) futures contracts and options on futures at different strike prices are available. The design of the first‐best hedging instrument is first derived and then it is used to examine the optimal hedging strategy in futures and options markets. The role of options as useful hedging tools is highlighted from the shape of the first‐best solution. © 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22:59–72, 2002     

Ethical decision‐making in Islamic financial institutions in light of Maqasid Al‐Sharia: A conceptual framework

This article develops a conceptual framework for ethical decision‐making in Islamic financial institution based on the Islamic methodological approaches on ethics. While making use of the similarities between the scientific method and the Islamic jurisprudence method, a framework is developed by means of argumentation and reasoning to integrate Sharia doctrines with the “plan, do, check and act” (PDCA) cycle as a managerial tool. Using Al‐Raysuni's analysis of Al‐Shatibi's work on maqasid al‐sharia, this article develops a framework to assess the ethical aspects of Islamic financial operations, which is then applied to hypothetical cases. This approach can help overcome the methodological deficiencies in measuring ethical performance in Islamic finance by focusing on the process of ethical decision‐making that leads to the outcomes of organizational behavior beyond legality of contracts. The framework outlines the conditions under which an activity that is considered legal and permissible contractually could lead to outcomes that can make it ethical or unethical.     

When is informed trading more prevalent?—An examination of options trading around Indian M&A announcements

This study examines the prevalence of informed trading around proximate-date versus far-date mergers and acquisitions (M&As). Further, different options strategies pursued by informed traders in proximate-date M&As are identified. The results highlight that proximate-date M&As are associated with a significantly higher level of informed trading vis-à-vis far-date M&As. Results on the choice of options strategies highlight that risk-averse, informed traders may pursue a straddle strategy to profit from their private information, while risk-seeking, informed traders may use a vertical call spread strategy. Informed traders desirous of hedging their existing positions may employ a protective put strategy.     

外汇远期套期保值在物流外汇风险管理的应用

在企业物流管理买卖外汇时会面临汇率风险。调查玩具企业外汇风险状况,使用外汇远期协议对外汇交易套期保值,使企业掌握外汇远期套期保值策略,有效地规避物流外汇风险,锁定产品收益和原材料成本,把企业经营得更好。