Classification Scheme of Derivatives in Islamic Finance
|Type of Derivative 1||Implicit Derivatives||Legacy Derivatives||Explicit Derivatives|
|Forward2||ijara thumma al-bay, murabaha 3, diminishing equity-musharaka||salam, bay mu’ajal, bay bithaman ajil (BBA), istisna||various commodity hedges and "wrappers"|
|Option||-||wa’ad, arbun, al-shart, (kyiyar al-tarwih)||foreign exchange option contracts|
|Swap||-||tawarruq, al-muqasah||wa’ad-based swap, profit rate swap, cross-currency swap|
Examples of Islamic contracts in each cross-classification are listed according to their main economic objective. Some contracts may have additional features that are missing in their conventional finance analog, e.g., arbun vs. options.
All existing shari’ah-compliant derivatives are bilaterally negotiated and are traded over-the-counter (OTC) without a formalized, exchange-based clearing and settlement. There are not Islamic futures contracts due to the prohibition of cash settlement without underlying asset transfer and profit-taking from an exchange of the same category of asset (see Table 1).
As sale-leaseback transaction.