The United Arab Emirates (UAE) has a multicultural society and a vast growing economy. The UAE is situated in the Middle East with the capital Abu Dhabi,an official language Arabic and covers over 83600 km carrying a population of over 8,200,000. Its Economy is reliant on oil, racking in 981 Billion Dirhams in respects to GDP ( Gross Domestic Product). it is a nation that is indeed blessed with riches that come in the form of oil and precious metals. the fact that it is a major hub that attracts people’s attention provides it with a huge pool of investors and one of the financial instruments investors engage in is derivatives (UAE government, 2009)..
‘A derivative is a financial instrument which is a contract between two parties that derives its price from an underlying asset’. Usually, the worth of the principal asset changes continuously as time goes by. These underlying assets could be bonds, stocks or even interest rates. Derivatives are used for hedging and mitigating risks that arise from foreign exchange and commodity dealings. They assure buyers of protection whether or not the type of derivative’s value increases or decreases during the time as specified in the contract (Dubai Islamic Bank, 2013) . All these benefits portray the purchase of a derivative as a good and before the establishment of derivatives, a substantial amount of people and organizations incurred financial losses due to the transaction of unsupervised assets such as money. UAE started introducing derivatives to the nation with gold and silver futures, then currency and after oil futures which are no longer traded in the financial markets. the current ones used in the UAE exist in the from of energy, metals, equities, future contracts and currency.
...
... middle of paper ...
...f banks, its own private bank, Dubai Islamic bank adheres to the shari’ah banking laws. These banking laws specify that derivatives must be matched up to the clients hedging objectives and no further. Thus, no profits are made through the use of derivatives but the clients’ interests are protected.
The UAE’s expansion of its derivative trading market shows that it is a huge part of its market and would lead to the further development and growth of the country. Although the nation is very much intertwined with the global market due to its tourist and trade reputation, it would lead to the further integration of the regional market with the international market which would open up more room for future advancement and unexploited benefits to the UAE. These derivates has boosted investments and developments throughout the UAE and will continue to do so in the future.
see, foreign exchange hedging was an area of key importance for AIFS given the level of currency
Caterpillar Inc. also faces the risk of its cash flow and earnings being affected by fluctuations in the exchange rates of currency, commodity prices, and interest rates. To control for this, the company’s Risk Management Policy ensures prudent management of interest rates, commodity prices, and exchange rates of foreign currency by allowing the use of derivative financial instruments. According to the policy, the derivative financial instruments are not supposed to be used for the purpose of speculation. In its pricing strategy, Caterpillar Inc. faces the risk of difficult shipping of its products. This risk can be encountered by offering its products on instalments and lease to its loyal customers (Caterpillar, Inc. (CAT), 2011).
Flawed financial innovations: the implementation of innovations in investment instruments such as derivatives, securitization and auction-rate securities before markets. The indispensable fault in them is that it was difficult to determine their prices. “Originate to distribute securities” was substituted by securitization which facilitated the increase in ...
The expanding global market has created both staggering wealth for some and the promise of it for others. Business is more competitive than ever before, and every business, financial or product-based, regardless of size or international presence is obligated to operate as efficiently as possible. A major factor in that efficient operation is to take advantage of every opportunity to maximize profits. Many multinational organizations have used derivatives for years in financial risk management activities. These same actions that can protect multinational organizations against interest rate futures and currency fluctuations can be used to create profits for those same organizations.
In conclusion, hedging risk with financial derivatives can give firm range of benefits such as lower probability of having financial distress, lower value of debt ratio, and earn tax benefit. It can be concluded that firm should hedge risk using financial derivatives because lot evidence shows that firm using this strategy is more successful than those who are not. However, since different type of companies facing different risks, they should not necessarily use the same hedging strategy.
After the crisis UAE’s economy suffered from 2008-2009 the economy has diversified itself and does not depend solely on oil anymore but also on other sectors such as tourism. The inflation rate of Dubai is 0.33% which is also significantly low (Dubai Statistics Centre,2016).The small medium enterprise does not want to take a risk where there are fluctuations in price level thereby effecting the buying power of people and also the demand and supply of the Al-Simpkin’s product. Furthermore,the government encourages foreign investment and besides the agent there are free zones such Jabel Ali which is the largest
Howells, Peter., Bain, Keith 2000, Financial Markets and Institutions, 3rd edn, Henry King Ltd., Great Britain.
The modern Islamic Finance industry is young, its timeline begin only a few decades ago. However, islamic finance is involving rapidly and continues to expend to serve a growing population of muslims as well as conventional.
In 2003, Capital Market Authority (CMA) was established under the Capital Market Law (CML) to act as regulatory supervisor for the capital market. Capital Market Authority regulate and supervise different critical issues such as market conduct, merger and acquisitions, corporate governance, and issuance of financial tools such as mutual funds, IPOs and Sukuks “Islamic bonds”. Thus, the establishment of CMA defined a new stage of financial liberalization in the country. CMA established the legal and regulatory platform to open up the Saudi capital market, support the privatization effort and increase public participation in the market while promoting efficiency and transparency. Furthermore, in March 2007, Tadawul exchange was re-incorporated as joint stock Company with a capital of USD 320 million to increase autonomy for the exchange. After the formation of CMA, the Saudi capital market continuously evolving in term of breadth, depth and complexity. In March 2010, the number of listed companies increased to 139 from 76 back in 2001 as local companies started to look at capital markets to fund their future financing needs. Due to the increasing in investors participation, Tadawul’s total market capitalization at a compound annual growth rate “CAGR” of 34.8% to SAR 1.9 trillion which about USD 507 billion between 2003-2007. Due to the financial crisis in 2008-2009 the market capitalization for Tadawul declined to SAR 1.2 trillion, which about USD 320 billion. Between the years of 2003-2007, the stock market activity grew in a fast pace without interruption in term of value, volume, and market cap along with rising in the number of transactions. The total trading volume of shares on Tadawul Stock Exchange increased at a CAGR of 11.4% between 2003-2009. The
Dar, H., Harvey, D. and Presley, J. 2014. Size, Profitability, and Agency in Profit- and Loss-sharing in Islamic Banking and Finance. [report] Cambridge, Massachusetts: Proceedings of the Second Harvard University Forum on Islamic Finance.
A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Derivative products like futures and options are important instruments of price discovery, portfolio diversification and risk hedging. The current scenario shows that the volatility spillover between spot
Examples of RPTs can be found in Note 45 of the Group’s financial statements. There were transfers of derivative assets from subsidiaries to the Bank, for $188,010,000 in 2009 and $193,959,000 in 2010 (Commonwealth 2010 p.220), including derivatives held for trading, hedging and other derivatives (Commonwealth 2010 p.135). With the transactions, the Group is better protected against fluctuations in interest rates and exchange rate. The RPTs also lower the risk of volatility in future cash flows, minimize exposures to the currency translation risk in foreign operations and increase the diversity of financial instruments to meet customers’ needs (...
...ofit. Hence, in terms of risk management Islamic banks are more reliable. In addition, with the increasing population of Muslims all over the world, and the recent economic theories proving Islamic banks’ advantages over traditional banks especially during hard times, I believe that new financial system that are based on Islamic principles will play a very important role in the near future.
According to Shari’ah, which is the guidelines underlined by Islam, there is several principles of Islamic Banking that are in accordance to its practices. They are :-
...ting in hedging activities in the financial futures market companies are able to reduce the future risk of rising interest rates. By participating in the financial futures market companies are able to trade financial instruments now for a future date (Block & Hirt, 2005).