Open AccessPricing of Participating Forward Contract
Author(s) -
Amina Dchieche
Publication year - 2020
Publication title -
global review of islamic economics and business (ed. online)
Language(s) - English
Resource type - Journals
ISSN - 2338-7920
DOI - 10.14421/grieb.2020.082-03
Subject(s) - forward contract , forward price , payment , islamic finance , business , profit (economics) , profit sharing , actuarial science , finance , microeconomics , economics , islam , futures contract , philosophy , theology
The purpose of this work is to model a participating forward contract permitting to avoid unlimited risk and unknown loss using a formula of risk sharing that includes the payment of an additional amount under specific price variations. This contract offers a new tool that Islamic finance can use since this finance is suspicious of classical forward contracts. The modeling is based on the classical forward equation, which incorporates the profit and loss sharing principle derived from Islamic finance. The participating forward is tested on oil data prices to compare the participating forward contract to the classical one. The participating forward offers a better possibility of profit to the seller and the buyer because of the PLS mechanism which reduces the risk for both parties. The main implication of this modeling is that the participating forward can provide some investors and Islamic banks with an alternative to conventional forward contracts.