The Impact of Interest Rate Changes on the Islamic Foreign Exchange Forward in the Malaysian Derivative Market

Nor Azmah Md. Arif, Ruhaini Muda, Md. Mahmudul Alam, Saadiah Mohamad

Abstract


ABSTRACT

Islamic foreign exchange forward plays a significant role to mitigate various foreign currency exchange risks. The main challenge that impedes the development and operation of the Islamic foreign exchange forward as a hedging instrument is the behaviour of relying on existing conventional framework with core conception of relying on interest rate and excessive risk taking. This study utilized monthly data from April 2004 to October 2017 of the Malaysian derivatives market. This study found that in the absence of an alternative profit-rate related benchmark and cross border activities, Islamic banks are constrained to use the interest rate benchmark. In the short run, both medium term (6-months) and longer term (12-months) tenures indicate faster speed of adjustment possibility due to higher trading volume and less demand for the medium term for the Islamic foreign exchange forward contract. It implies a need of the Islamic foreign exchange forward as a longer term hedging instrument and not for a short term speculation and risk-taking purposes, as prohibited by shariah.

Keywords: Islamic hedging; Islamic foreign exchange forward; Risk management; Malaysia.

ABSTRAK

Pertukaran asing kehadapan Islam memainkan peranan penting untuk mengurangkan risiko pertukaran mata wang asing. Cabaran utama yang menghalang perkembangan dan operasi pertukaran asing kehadapan Islam sebagai instrumen lindung nilai adalah tingkah laku bergantung kepada kerangka konvensional sedia ada dengan konsep utama bergantung kepada kadar faedah dan pengambilan risiko yang berlebihan. Kajian ini menggunakan data bulanan dari April 2004 hingga Oktober 2017 dari pasaran derivatif Malaysia. Kajian ini mendapati bahawa jika tiada penanda aras berkaitan keuntungan dan aktiviti rentas sempadan alternatif, bank Islam dikekang menggunakan penanda aras kadar faedah. Dalam jangka masa pendek, tempoh jangka sederhana (6 bulan) dan tempoh jangka panjang (12 bulan) menunjukkan kelajuan pelarasan yang lebih pantas disebabkan oleh jumlah dagangan yang lebih tinggi dan permintaan yang kurang untuk jangka masa sederhana bagi kontrak hadapan pertukaran asing kehadapan Islam. Ia bermaksud keperluan pertukaran asing kehadapan Islam sebagai instrumen lindung nilai jangka panjang dan bukan untuk spekulasi jangka pendek dan tujuan mengambil risiko, seperti yang dilarang oleh shariah.

Kata kunci: Lindung nilai Islam; pertukaran asing islam ke hadapan; pengurusan risiko; Malaysia.


Keywords


G13 Islamic hedging; (G23) Islamic foreign exchange forward; (G14) Malaysian derivative market.

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