Professional Documents
Culture Documents
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CONTENTS
Introduction
Section 1: An Introduction to Structured Products
Section 2: Islamic Structured Products
Section 3: Islamic SPs: Examples of SPs
Section 4: SPs: Investment vis-à-vis hedging
Section 6: Common Shariah Issues in SPs
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DEFINITION
Structured Products is a combination of derivatives and
traditional financial instruments such as stocks and bonds,
which are pooled into a single financial instrument.
Synthetic Investment instruments specially created to meet
specific needs that cannot be met from the standardized
financial instruments available in the markets.
The U.S. Securities and Exchange Commission (SEC) defines
structured securities as securities whose characteristics of
cash flow rely upon one or more indices or that have
embedded forwards or options or securities where a return
to the investor and payment obligation of the issuer are
contingent upon, or are highly sensitive to, changes in the
value of underlying assets, indices, interest rates or cash
flows. 3
SP UNDER SC’S GUIDELINES
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COMMON FEATURES OF SP
SP are structured investment products where no resemblance to any
particular asset class, or any standardized financial instruments is to be
found
It combines two or more financial instruments, one of which is generally a
derivative, to create a single “structured and packaged product
The returns are linked to the performance of an underlying asset or
benchmark such as interest rates, equity markets, commodities, corporate
credits, foreign exchange markets, real estate or other financial instrument
Some structured products offer the feature of capital protection of some or
all of the capital if certain conditions are met.
Some SIPs, besides offering potential returns, also offer hedging mechanisms
like dual currency structured products.
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TYPES OF STRUCTURED PRODUCTS
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GENERAL STRUCTURES OF ISLAMIC SP
Profit
Initial Proceed
maximasation
proceeds allocation portfolio
Manager (SP
Client
Structurer)
Capital Protected
Investment
Portfolio
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TYPES OF ISLMIC SP
Equity-linked notes
Interest rate-linked notes
FX-linked notes
Commodity linked notes
Bond-linked notes
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UNDERLYING CONTRACTS AND MODELS
• Wakalah
At fund • Mudharabah
raising level
• Wa’d
At activities • Urbun
level •
•
Tawarruq
‘Inah
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‘URBUN MODEL
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HSBC AMANAH ISLAMIC EQUITY-LINKED STRUCTURED
INVESTMENT-I
HSBC HK or Paris
Wakalah fi Istithmar
Client HSBC
Islamic Fixed
Income
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ISLAMIC ALL-STARS RESTRICTED MUDHARABAH STRUCTURED
INVESTMENT-I (ISLAMIC ALL-STARS – CIMB ISLAMIC
Islamic Debt
Instruments
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WA’D MODEL
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MAYBANK STRUCTURED ISLAMIC DEPOSIT STRIDE-I
Wa’ad to purchase
Copper and
Return on Investment wheat
(if the wa’ad is exercised)
Reference Underlying
Mudharabah
Client Maybank London Metal Exchange (LME)
Copper spot
Chicago Board of Trade
(CBOT) Whaet spot
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WA’DAN MODEL
Cash
ISLAMIC Wa’d (Promise 1) To sell P1 asset
ACCOUNT Index
CLIENT (Shariah or other
compliant reference
Securities) Wa’d (Promise 2) to buy
P1 underlying
Equities
E.g:
1) Deutsche Bank Structured Product
2) LLB Top 20 Middle East Total Return Index (ABN Amro N .V)
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ISLAMIC HEDGING
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PREAMBLE
Risk is the possibility that the outcome of an event cound be
adversed.
Hedging is a mechanism to reduce risk.
Besides investment, SPs are also structured for hedging purposes:
Islamic Profit Rate Swaps
Islamic Currency Hedging
Islamic Option
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FORWARD CURRENCY CONTRACT
A contractually binding agreement between two
parties to sell and buy two different currencies now, at
certain price, but the delivery will be at an agreed
future time.
Elements:
Binding agreement to sell or buy
The rate of exchange is fixed when the contract is made. Normally, it
differs from the rate of a spot transaction
Delivery of the currencies will be made at an agreed future time, either a
specific date or any time between two specific dates, depending on the
contract terms
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ILLUSTRATION ON FORWARD CURRENCY CONTRACT
Example:
Company ABC signs an agreement to do a forward currency contract with
bank XYZ and the rate will be RM5.20 for EURO1.00.
(Note: Exchange rate for forward contract will differ from the spot value)
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ISLAMIC FORWARD (WA’D)
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ISLAMIC FORWARD (MUWA’ADAH)
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ISLAMIC FORWARD (TAWARRUQ)
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COMPARISON
FORWARD CURENCY ISLAMIC FORWARD
CONTRACT
The contract is made on the On the dealing date (1/4/2005), a unilateral
dealing date (1/4/2005) promise is given by one party to do a contract on
3/7/2005, but the real contract will only take place
on the value date (3/7/2005)
This agreement is binding and Promise given (dealing date) is only binding on
enforceable to both parties the party who makes the promise
Exchange rate is fixed on the Exchange rate is fixed on the dealing date
dealing date (1/4//2005) (1/4//2005)
Delivery is made on the value The real contract and spot delivery will be made
date (3/7/2005) on the value date (3/7/2005) 25
ISLAMIC OPTION
‘Urbun
Wa’d with fee
Wa’d and Commodity Murabahah
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SOME SHARIAH ISSUES
Amalgamation of contracts
The use of Index
Islamic Options : wa’ad vis-à-vis urbun
Two Unilateral Promise vis-à-vis bilateral promise
The acceptance of tawarruq structure
The parent gives purchase undertaking to the investors to purchase
back the portfolio at face value.
Al-wakalah bi al-istithmar vis-à-vis mudharabah
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AMALGAMATION OF CONTRACTS
In most Structured Products, two or more contracts will be executed
This gives rise to the issue of amalgamation of contracts
Differences of opinion on the matter
Unanimous: Cannot combine sale with loan
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THE USE OF INDEX
How far can we use index in benchmarking the profit
The practice so far:
Totally conventional index: the underlying and the index are conventional
The underlying is Islamic, but the index is conventional
The underlying and the index are Islamic
More than one indices: Combination of Islamic and conventional
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ISLAMIC OPTIONS : WA’AD VIS-À-VIS
URBUN
Rulings against conventional option
How to replicate conventional option
Wa’ad vis-avis urbun
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SHARIAH RULING
Fiqh Academy of Jeddah has also allowed
this contract provided that:
1) It is a right given to the buyer to have a
waiting period to rethink about the contract
2) The period must be determined
3) The deposit paid will be considered part of
the purchase price if the buyer decided to
proceed with the contract.
4) If he withdrew, the seller will have the right
to keep the deposit
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CONT’D
Option ‘Urbun
It is the right to buy or sell It is only the right to buy
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THE ACCEPTANCE OF TAWARRUQ
STRUCTURE
In many structured products, commodity murabahah is widely used to:
Protect capital
To benefit from the upside market
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PURCHASE UNDERTAKING BY THE PARENT OR SISTER COMPANY
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