Maheran Mohd Jaffar

Comparative analysis of Geometric Brownian motion model in forecasting FBMHS and FBMKLCI index in Bursa Malaysia

On April 17, 1999, the Kuala Lumpur Stock Exchange, today known as Bursa Malaysia, launched a new index called Syariah Index (SI) to facilitate participation in the equity investment in accordance with Islamic syariahs principles. Syariah-based equity is basically shares of the company meeting the criteria of Islamic jurisprudence. Indices are used as a performance benchmark for portfolios such as mutual fund shares. The index is a device that allows investors to measure the performance of the group share of the market. This paper forecasts the FTSE Bursa Malaysia Hijrah Shariah (FBMHS) and FTSE Bursa Malaysia KLCI (FBMKLCI) index using the better model of Geometric Brownian motion in terms of volatility models and number of data. This paper shows that forecasting using log volatility and 4 week daily data gives accurate forecasting.

A review on mathematical methods of conventional and Islamic derivatives

Despite the impressive growth of risk management tools in financial institutions, Islamic finance remains miles away behind the conventional institutions. Islamic finance products need to comply with the syariah law and prohibitions, therefore they can use fewer of the available risk management tools compared to conventional. Derivatives have proven to be the effective hedging technique and instrument that broadly being used in the conventional institutions to manage their risks. However, derivatives are not generally accepted as the legitimate products in Islamic finance and they remain controversial issues among the Islamic scholars. This paper reviews the evolution of derivatives such as forwards, futures and options and then explores the mathematical models that being used to solve derivatives such as random walk model, asset pricing model that follows Brownian motion and Black-Scholes model. Other than that, this paper also critically discuss the perspective of derivatives from Islamic point of view. In conclusion, this paper delivers the traditional Islamic products such as salam, urbun and istijrar that can be used to create building blocks of Islamic derivatives.Despite the impressive growth of risk management tools in financial institutions, Islamic finance remains miles away behind the conventional institutions. Islamic finance products need to comply with the syariah law and prohibitions, therefore they can use fewer of the available risk management tools compared to conventional. Derivatives have proven to be the effective hedging technique and instrument that broadly being used in the conventional institutions to manage their risks. However, derivatives are not generally accepted as the legitimate products in Islamic finance and they remain controversial issues among the Islamic scholars. This paper reviews the evolution of derivatives such as forwards, futures and options and then explores the mathematical models that being used to solve derivatives such as random walk model, asset pricing model that follows Brownian motion and Black-Scholes model. Other than that, this paper also critically discuss the perspective of derivatives from Islamic point of view....

The application of new musyarakah model in Islamic banking products

Musyarakah contract is a joint venture contract between two or more parties where the profit is shared according to the agreed profit sharing ratio. The new musyarakah model internalizes this concept and takes into account the investment of two parties using two different rates of profit as well as two profit sharing rates. At present, this model is the only model that uses two profit sharing rates to ensure justice in a joint venture investment. This concept can be extended in other Islamic investment or banking products that will attract more foreign investors who are keen in musyarakah products. Apart from this, it may initiate other researches to develop new products in Islamic banking/financing and investment.

Mudharabah and musyarakah models of joint venture investments between two parties

Musyarakah contract is a joint venture between two or more parties and the profit is shared according to the agreed profit sharing ratio. Currently, less than 2% of the financial portfolio of Islamic banks in Malaysia uses this concept although most Muslim economist scholars consider it as a dynamic concept. The paper discusses quatitatively some type of profit and loss sharing contracts that maybe use in managing a joint venture between a capital provider and entrepreneur using mudharabah or musyarakah contracts. It elaborates in the form of mathematical models and argues on the weakness of the model. A new musyarakah model is introduced that uses the compound interest model and two profit sharing ratios to attain a fair and justified investment of a joint venture.

The net present value of mudharabah and musharakah models

Islamic banks in Malaysia offer varieties of products that use the Islamic concepts. Two of the concepts that are considered as dynamic concepts by most of Muslim economic scholars are mudharabah and musharakah. These concepts are also known as the equity-financing or the profit and loss contracts which to certain extend have some risks. Currently, less than 2% of Islamic products in Malaysia use these concepts which do not portray its dynamism. Hence by enhancing the quantitative research on the concepts, the Islamic banks may have more information in making decision of using these concepts. The paper introduces the net present value (NPV) equation for mudharabah and musharakah model. In NPV method, the investment should be accepted if the value of NPV is positive which means the investment will be profitable and the value of NPV will give the value in monetary units. This project shows that musharakah model gives higher NPV.

Modeling the traded commodity salam contract by using equivalent martingale approach

In developing a new Islamic derivatives product, it needs to follow five syariah prohibitions which are riba (interest paid), rishwah (corruption), gharar (uncertainty or unnecessary risk), maysir (speculation or gambling) and jahl (taking advantage of the counterparty’s ignorance). There exist several Islamic traditional contracts that can be designed as derivatives such as salam, urbun, istijrar, wa’ad and murabaha. However, this study focuses on salam contract since a lot of discussion on its acceptability available in the literature. This study introduces a mathematical model of traded commodity salam by using the equivalent martingale approach. Under this approach, the risk neutral process of underlying asset is being formed by using the Girsanov theorem. Then, under no risk and no arbitrage argument, the partial differential equation for the value of commodity salam contract is being derived. Finally, under Feynman-Kac theorem, the partial differential equation is being solved analytically subjects ...

Application of numerical method in calculating the internal rate of return of joint venture investment using diminishing musyarakah model

Islamic banking in Malaysia offers variety of products based on Islamic principles. One of the concepts is a diminishing musyarakah. The concept of diminishing musyarakah helps Muslims to avoid transaction which are based on riba. The diminishing musyarakah can be defined as an agreement between capital provider and entrepreneurs that enable entrepreneurs to buy equity in instalments where profits and losses are shared based on agreed ratio. The objective of this paper is to determine the internal rate of return (IRR) for a diminishing musyarakah model by applying a numerical method. There are several numerical methods in calculating the IRR such as by using an interpolation method and a trial and error method by using Microsoft Office Excel. In this paper we use a bisection method and secant method as an alternative way in calculating the IRR. It was found that the diminishing musyarakah model can be adapted in managing the performance of joint venture investments. Therefore, this paper will encourage mo...

Modeling commodity salam contract between two parties for discrete and continuous time series

In order for Islamic finance to remain competitive as the conventional, there needs a new development of Islamic compliance product such as Islamic derivative that can be used to manage the risk. However, under syariah principles and regulations, all financial instruments must not be conflicting with five syariah elements which are riba (interest paid), rishwah (corruption), gharar (uncertainty or unnecessary risk), maysir (speculation or gambling) and jahl (taking advantage of the counterparty’s ignorance). This study has proposed a traditional Islamic contract namely salam that can be built as an Islamic derivative product. Although a lot of studies has been done on discussing and proposing the implementation of salam contract as the Islamic product however they are more into qualitative and law issues. Since there is lack of quantitative study of salam contract being developed, this study introduces mathematical models that can value the appropriate salam price for a commodity salam contract between tw...

Black-Scholes finite difference modeling in forecasting of call warrant prices in Bursa Malaysia

Call warrant is a type of structured warrant in Bursa Malaysia. It gives the holder the right to buy the underlying share at a specified price within a limited period of time. The issuer of the structured warrants usually uses European style to exercise the call warrant on the maturity date. Warrant is very similar to an option. Usually, practitioners of the financial field use Black-Scholes model to value the option. The Black-Scholes equation is hard to solve analytically. Therefore the finite difference approach is applied to approximate the value of the call warrant prices. The central in time and central in space scheme is produced to approximate the value of the call warrant prices. It allows the warrant holder to forecast the value of the call warrant prices before the expiry date.

Analytic hierarchy process (AHP) as a tool in asset allocation

Allocation capital investment into different assets is the best way to balance the risk and reward. This can prevent from losing big amount of money. Thus, the aim of this paper is to help investors in making wise investment decision in asset allocation. This paper proposes modifying and adapting Analytic Hierarchy Process (AHP) model. The AHP model is widely used in various fields of study that are related in decision making. The results of the case studies show that the proposed model can categorize stocks and determine the portion of capital investment. Hence, it can assist investors in decision making process and reduce the risk of loss in stock market investment.