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Concept, Scope of Futures Contracts and Speculation

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Chapter Summary

In the evaluation of futures contracts from an Islamic point of view, the chapter is primarily concerned with commodity futures as the most probable area in which an Islamic alternative is possible. The primary purpose of a futures market is to facilitate hedging. However, if there were hedgers in the futures market in order to ensure a permanent balance between short and long hedgers, there would be little need for speculators. Many commentators have tried to link the occurrence of crises with speculation. The two crises generally cited in this regard by some Muslim writers and which occurred in Muslim countries are the market crash in Kuwait in 1984 and the financial crisis in South East Asia in 1997. Before addressing the claim of a link between the two crises and speculation, the chapter describes the causes behind the crisis of the Kuala Lumpur Commodity Exchange in March 1984.

Keywords: commodity arbitrage; commodity futures market; financial crisis; hedging; Islamic finance; margin trading; speculation



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