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Summary
Summary
A comprehensive look at the essentials of Islamic capital markets
Bringing together theoretical and practical aspects of capital markets, Islamic Capital Markets offers readers a comprehensive insight into the institutions, instruments, and regulatory framework that comprise Islamic capital markets. Also exploring ideas about money, central banking, and economic growth theory and their role in Islamic capital markets, the book provides students and practitioners with essential information about the analytical tools of Islamic capital markets, serves as a guide to investing in Islamic assets, and examines risk management and the structure of Islamic financial products.
Author and Islamic finance expert Noureddine Krichene examines the development of leading Islamic capital markets, including Malaysia, looking at sukuks and stocks in detail and emphasizing valuation, duration, convexity, immunization, yield curves, forward rates, swaps, and risks. Analyzing stock markets, stock valuation, price-earnings ratio, market efficiency hypothesis, and equity premiums, the book addresses uncertainty in capital markets, portfolio diversification theory, risk-return trade-off, pricing of assets, cost of capital, derivatives and their role in hedging and speculation, the principle of arbitrage and replication, Islamic structured products, the financing of large projects, and more.
Emphasizes both theoretical and practical aspects of capital markets, covering analytical concepts such as the theory of arbitrage, pricing of assets, capital market pricing model, Arrow-Debreu state prices, risk-neutral pricing, derivatives markets, hedging and risk management, and structured products Provides students and practitioners of finance with must-have information about the analytical tools employed in Islamic capital markets Examines all the most recent developments in major Islamic capital markets, including MalaysiaDiscussing the advantages of Islamic capital markets and the prospects for their development, Islamic Capital Markets gives readers a fundamental grounding in the subject, with an emphasis on financial theory and real world practice.
Author Notes
DR. NOUREDDINE KRICHENE, PHD, earned a doctorate in economics from the University of California, Los Angeles. He has taught Islamic finance at the Global University, INCEIF, in Malaysia, and was an economist with the International Monetary Fund Economist Program from 1986 to 2009. From 2005 to 2007, he was advisor at the Islamic Development Bank of Saudi Arabia. His areas of expertise are the international payments system, macroeconomic policies, finance, and energy and water economics.
Table of Contents
Preface |
Acknowledgments |
Glossary of Arabic Terms |
Part 1 Islamic Capital Markets: Tools of Securities Investment, Asset Pricing, Risk-Management, and Portfolio Performance |
Chapter 1 Capital Theory and Islamic Capital Market |
On the Nature of Capital |
On the Nature of Interest and Profit |
Capital Theory in Islamic Finance |
Time Preference and Capital Markets |
Capital Productivity: The Inter-Temporal Production Opportunity Set |
General Equilibrium: Time-preference and Capital Productivity |
Model of Capital as a Subsistence Fund |
Capital as Engine of Growth |
The Capital Market and The Economy |
The Intermediation Role of the Capital Market |
Summary |
References |
Questions |
Chapter 2 Portfolio Theory and Risk-Return Tradeoff |
Market Uncertainty |
Portfolio Diversification Theory |
The Portfolio Diversification in the Case of Two Risky Assets |
A Model of Riskless Asset and a Risky Asset |
Asset Pricing Based on Risk-Return Tradeoff |
The Security Market Line |
Efficiency Frontier, Capital Market Line, Characteristic Line, and the Security Market Line |
The Cost of Capital Based on the Capital Asset Pricing Model |
Summary |
References |
Questions |
Chapter 3 The Analytics of Sukuks |
Valuation of an Asset |
Valuation of Sukuks |
Spot Rates and Forward Rates |
The Term Structure of Rates of Return |
Sukuk Duration |
Sukuk Convexity |
Immunization of Sukuk Portfolio |
Hedging with Futures Contracts |
Understand Risks in Sukuks |
Summary |
References |
Questions |
Chapter 4 Islamic Stocks |
Sharia Screening |
Islamic Indexes |
Speculation and Gambling |
Stock Yield |
Common Stock Valuation |
Forecasting Stock Prices |
Fundamental and Technical Analysis |
The Efficiency Hypotheses of Stock Markets |
Evaluating Companies |
Mechanics of Trading |
Summary |
References |
Questions |
Chapter 5 The Cost of Capital |
Objective of the Firm: Market Value Maximization and the Cost of Capital |
Project Selection: the Hurdle Rate |
Defining Capital Cost: the Discount Rate |
The Net Cash Flow |
The Present Value Formula |
Relationship Between Risk and the Cost of Capital |
Estimating the Cost of Equity Capital and Overall Cost of Capital |
Capital Asset Pricing Model (CAPM) |
Certainty-Equivalent Versus Risk Adjusted Discount Rates |
Applying the CAPM to Calculate Certainty-Equivalent Cash Flow |
The Valuation of Securities, Leverage, and the Cost of Capital: Modigliani and Miller Theory |
Weighted Average Cost of Capital |
Implications of the Capital Cost Analysis for the Theory of Investment: Capital Structure and Investment Policy |
The Agency Problem |
Summary |
References |
Questions |
Chapter 6 Asset Pricing Under Uncertainty |
Modelling Risk and Return |
Market Efficiency and Arbitrage-free Pricing |
Basic Principles of Derivatives pricing |
Summary |
References |
Questions |
Chapter 7 The Consumption-based Pricing Model |
Inter-temporal Optimization and Implication to Asset Pricing |
Asset Specific Pricing and Correction for Risk |
Expected Return-beta Representation |
The Mean Variance Frontier |
Risk Neutral Pricing Implied by the General Pricing Formula |
Consumption-based Contingent Discount Factors |
The Equity Premium and Interest Rate Puzzles |
Summary |
References |
Questions |
Chapter 8 Futures Markets |
Institutional Aspects of Forward and Futures Contracts |
Valuation of Forward and Futures Contracts |
Foreign currencies futures and the yield rate parity |
Hedging |
Rolling the Hedge Forward |
The Hedge Ratio |
Cross Hedge |
Speculating in Futures Markets |
Summary |
References |
Questions |
Chapter 9 Stock Index Futures |
Specifications of the Stock Index Futures Contract |
The Pricing of a Stock Index Futures contract |
Hedging with Stock Index Futures |
The Minimum Risk Hedge Ratio |
Cross Hedge |
Target Beta and Capture Alpha with Stock Index Futures |
Constructing an indexed portfolio |
Asset Allocation |
Portfolio Insurance |
Index Arbitrage |
Program Trading |
Summary |
References |
Questions |
Chapter 10 Interest Rates Futures Markets and Applications to Sukuks |
Types of Interest Rate Futures Contracts |
The Pricing of Sukuk Forward Contracts |
Hedging with Interest Rate Futures |
Interest Rate Futures in Sukuk Portfolio Management |
Immunization of Sukuk Portfolio with Interest Rate Futures |
Summary |
References |
Questions |
Chapter 11 Basic Principles of Options |
Options: Basic Definitions |
Trading Strategies |
Option Pricing |
Pricing the Put Option |
Call Put Parity |
The Binomial Model: Extension to Two Periods |
The Option Delta |
Risk Neutral Pricing |
The Black Scholes (BS) Model |
Currency Options |
Caps and Floors |
Summary |
References |
Questions |
Chapter 12 Swaps |
Structure and Payoff of a Swap |
Motivations for the Swap |
The valuation of Plain Vanilla Swaps: the Swap Rate |
Currency Swaps |
Pricing a Currency Swap |
Equity Swap |
Credit Default Swap |
Total Return Swap |
Structured Notes: Inverse Floater and Bear Floater |
Options on Interest Rate Swaps: Swaptions |
Interest Rate Swaps as Hedging Instruments |
Summary |
References |
Questions |
Chapter 13 Mutual Funds |
What is a Mutual Fund? How Does a Mutual Fund Work? |
Index Funds and Hedge Funds |
Types of Mutual Funds |
Fees and Expenses |
Regulations |
Mutual Fund Performance |
Mutual fund Advantages and Risks |
Summary |
References |
Questions |
Chapter 14 Portfolio Performance and Value-at-Risk |
Nature and Purpose of the Performance Evaluation |
Measuring Performance |
Methodologies for Evaluating Performance |
The Fama-French Three Factor Model |
Performance Attribution Models |
Value at Risk (VaR) |
Methods for Calculating VaR |
Stress Testing and Back Testing |
Summary |
References |
Questions |
Part 2 Money and Capital Markets |
Chapter 15 The Banking System |
On the Nature of Central Banking |
On the Nature of Money |
Fractional Banking and the Money Multiplier |
The Central Bank |
The Reserves Market: Demand and Supply of Reserves |
The Regulatory and Supervisory Role of the Central Bank |
The Debate Over the Role of the Central Bank |
The Theory of Two Interest Rates |
Central Banking and Financial Markets |
Central Bank in Islamic Finance |
Summary |
References |
Questions |
Chapter 16 The Demand for Money |
Motives for Holding Money |
Demand for Money as Affected by the Rate of Interest |
The Baumol-Tobin Model of Money Demand |
Equilibrium in the Market for Money |
Demand for Money as Influenced by the Price Level |
Other Determinants of the Demand for Money |
Effects of Changes in the Money Market |
The Quantity Theory of Money and Money Demand |
The Cambridge Transaction Approach |
The Restatement of the Quantity Theory as a Demand for Money Function |
Summary |
References |
Questions |
Chapter 17 Capital Markets and The Macro-Economy |
Financial Crises and Approaches for Recovery |
The Income-expenditure Sector |
The Monetary Sector |
Macroeconomic Equilibrium |
Macroeconomic Equilibrium Under Keynesian Assumptions |
ClassicistsâÇÖ Approaches to Recovery from Depression |
Islamic Approaches to Recovery from Depression |
Stagflation and Post-2008 Crisis Unemployment |
Summary |
References |
Questions |
Part 3 Regulations and Institutions of Capital Markets and Islamic Structured Finance |
Chapter 18 Institutions and Regulations of Capital Markets |
Regulatory Legislation |
The Securities and Exchange Commission |
The US Commodity Futures Trading Commission (CFTC) |
The Stock Market |
Brokerage Firm |
Online Trading: A form of Discount Brokerage |
Investment Advisers |
Clearinghouse |
Central Securities Depository |
Investment Banks |
Investment Companies |
Investment Funds |
Mutual Funds |
Exchange-traded Fund |
Hedge Funds |
Money Market Fund |
Structured Investment Vehicle |
Summary |
References |
Questions |
Chapter 19 Institutions and Instruments of Islamic Capital Markets |
The Sharia Advisory Council |
Islamic Modes of Financing and Islamic Instruments |
Islamic Funds |
Islamic Derivatives Markets |
Guidelines on the Offering of Islamic Securities |
Summary |
References |
Questions |
Chapter 20 Sukuks |
Asset Securitization |
Structure and Legal Documentation of Islamic Private Debt Securities |
Types of Sukuk Structures |
Sukuk Issuance in Practice |
Risks Underlying Sukuks Structures |
Managing the Financial Risks of Sukuk Structures |
Summary |
References |
Questions |
Chapter 21 Islamic Structured Products |
Structured Finance |
Definition of Structured Products |
Features of Structures Products |
Risks and Benefits of Structured Products |
Types of Structured Products |
Financial Engineering of Structured Products |
Islamic Structured Products |
Profit Rate Swap Structure Based on Simplified Parallel Murabaha |
Challenges for Islamic Structurers |
Examples of Structured Products |
Summary |
References |
Questions |
About the Author |
Index |