A Comparison of Speculation and Hedging in Derivative Market
Abstract
This study examines the activity of speculation and hedging that have been executed in
derivative markets since risk allocation should be facilitated in the markets in accordance to objective
of shariah (Islamic Law) which is in an intersected line with the purpose of Islamic economics to
ensure the well-being of society and the market efficiency. Therefore, this paper encapsulating the
discussion around their operational activity, and shariah issues related to speculation and hedging in
derivative market. Descriptive and textual analysis approach is adopted and all data extracted from
journals and articles from websites have been used as references by searching some keywords for
instance: “speculation”, “hedging”, “risk management”, “derivative markets” and “forward/future
markets”. This study concluded that hedging is an activity to reduce the risks associated with
uncertainty, while speculation is a bet against the movements of the market to profit from
fluctuations in the price of derivatives. Notwithstanding the fact that some scholars might accept a
certain kind of speculation to help delegate and distribute risk to those who can afford to bear it, the
constructive regulations must be taken to ensure the derivative contracts employed by Islamic
Financial institutions are carried out only for the purpose of hedging.
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