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Islamic Capital Markets: Theory and Practice

Book Description

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 Malaysia

  • Discussing 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.

    Table of Contents

    1. Cover
    2. Contents
    3. Title
    4. Copyright
    5. Dedication
    6. Preface
    7. Acknowledgments
    8. Glossary of Arabic Terms
    9. Part One: Islamic Capital Markets: Tools of Securities Investment, Asset Pricing, Risk Management, and Portfolio Performance
      1. Chapter 1: Capital Theory and Islamic Capital Markets
        1. On the Nature of Capital
        2. On the Nature of Interest and Profit
        3. Capital Theory in Islamic Finance
        4. Time Preference and Capital Markets
        5. Capital Productivity: The Intertemporal Production Opportunity Set
        6. General Equilibrium: Time Preference and Capital Productivity
        7. Model of Capital as a Subsistence Fund
        8. Capital as an Engine of Growth
        9. The Capital Market and the Economy
        10. The Intermediation Role of the Capital Market
        11. Summary
        12. References
        13. Questions
      2. Chapter 2: Portfolio Theory and Risk–Return Tradeoff
        1. Market Uncertainty
        2. Portfolio Diversification Theory
        3. Portfolio Diversification in the Case of Two Risky Assets
        4. A Model of a Riskless Asset and a Risky Asset
        5. Asset Pricing Based on Risk–Return Tradeoff
        6. The Security Market Line
        7. Efficiency Frontier, Capital Market Line, Characteristic Line, and Security Market Line
        8. The Cost of Capital Based on the Capital Asset Pricing Model
        9. Summary
        10. References
        11. Questions
      3. Chapter 3: The Analytics of Sukuks
        1. Valuation of an Asset
        2. Valuation of Sukuks
        3. Yield to Maturity
        4. Reinvestment of Sukuk Coupons
        5. The Par Yield
        6. Spot Rates and Forward Rates
        7. The Term Structure of Rates of Return
        8. Sukuk Duration
        9. Sukuk Convexity
        10. Immunization of Sukuk Portfolio
        11. Summary
        12. References
        13. Questions
      4. Chapter 4: Islamic Stocks
        1. Sharia Screening
        2. Islamic Indexes
        3. Speculation and Gambling
        4. Stock Yield
        5. Common Stock Valuation
        6. Forecasting Stock Prices
        7. Fundamental and Technical Analysis
        8. The Efficiency Hypotheses of Stock Markets
        9. Evaluating Companies
        10. Mechanics of Trading
        11. Summary
        12. References
        13. Questions
      5. Chapter 5: The Cost of Capital
        1. Objective of the Firm: Market Value Maximization and the Cost of Capital
        2. Project Selection: The Hurdle Rate
        3. Defining Capital Cost: The Discount Rate
        4. The Net Cash Flow
        5. The Present Value Formula
        6. Relationship between Risk and the Cost of Capital
        7. Estimating the Cost of Equity Capital and Overall Cost of Capital
        8. Capital Asset Pricing Model (CAPM)
        9. Risk-Adjusted versus Certainty-Equivalent Discount Rates
        10. Applying the CAPM to Calculate Certainty-Equivalent Cash Flow
        11. The Valuation of Securities, Leverage, and the Cost of Capital: The Modigliani and Miller Theory
        12. Weighted Average Cost of Capital
        13. Implications of the Capital Cost Analysis for the Theory of Investment: Capital Structure and Investment Policy
        14. The Agency Problem
        15. Summary
        16. References
        17. Questions
      6. Chapter 6: Asset Pricing under Uncertainty
        1. Modeling Risk and Return
        2. Market Efficiency and Arbitrage-Free Pricing
        3. Basic Principles of Derivatives Pricing
        4. Summary
        5. References
        6. Questions
      7. Chapter 7: The Consumption-Based Pricing Model
        1. Intertemporal Optimization and Implication to Asset Pricing
        2. Asset-Specific Pricing and Correction for Risk
        3. Relationship between Expected Return and Beta
        4. The Mean Variance (mv) Frontier
        5. Risk-Neutral Pricing Implied by the General Pricing Formula
        6. Consumption-Based Contingent Discount Factors
        7. Equity Premium and Interest Rate Puzzles
        8. Summary
        9. References
        10. Questions
      8. Chapter 8: Futures Markets
        1. Institutional Aspects of Forward and Futures Contracts
        2. Valuation of Forward and Futures Contracts
        3. Foreign Currencies Futures and the Yield Rate Parity
        4. Hedging
        5. Rolling the Hedge Forward
        6. The Hedge Ratio
        7. Cross Hedging
        8. Speculating in Futures Markets
        9. Summary
        10. References
        11. Questions
      9. Chapter 9: Stock Index Futures
        1. Specifications of the Stock Index Futures Contract
        2. The Pricing of a Stock Index Futures Contract
        3. Hedging with Stock Index Futures
        4. The Minimum Risk Hedge Ratio
        5. Cross Hedging
        6. Target Beta and Capture Alpha with Stock Index Futures
        7. Constructing an Indexed Portfolio
        8. Asset Allocation
        9. Portfolio Insurance
        10. Index Arbitrage
        11. Program Trading
        12. Summary
        13. References
        14. Questions
      10. Chapter 10: Interest-Rate Futures Markets and Applications to Sukuks
        1. Types of Interest-Rate Futures Contracts
        2. The Pricing of Sukuk Forward Contracts
        3. Hedging with Interest-Rate Futures
        4. Interest-Rate Futures in Sukuk Portfolio Management
        5. Immunization of Sukuk Portfolio with Interest-Rate Futures
        6. Summary
        7. References
        8. Questions
      11. Chapter 11: Basic Principles of Options
        1. Options: Basic Definitions
        2. Trading Strategies
        3. Option Pricing
        4. Pricing the Put Option
        5. Call–Put Parity
        6. The Binomial Model: Extension to Two Periods
        7. The Option Delta
        8. Risk-Neutral Pricing
        9. The Black–Scholes (BS) Model
        10. Currency Options
        11. Caps and Floors
        12. Summary
        13. References
        14. Questions
      12. Chapter 12: Swaps
        1. Structure and Payoff of a Swap
        2. Motivations for the Swap
        3. The Valuation of Plain-Vanilla Swaps: The Swap Rate
        4. Currency Swaps
        5. Pricing a Currency Swap
        6. Equity Swap
        7. Credit Default Swap
        8. Total Return Swap
        9. Structured Notes: Inverse Floater and Bear Floater
        10. Options on Interest Rate Swaps: Swaptions
        11. Interest-Rate Swaps as Hedging Instruments
        12. Summary
        13. References
        14. Questions
      13. Chapter 13: Mutual Funds
        1. How Does a Mutual Fund Work?
        2. Index Funds and Hedge Funds
        3. Types of Mutual Funds
        4. Fees and Expenses
        5. Regulations
        6. Mutual Fund Performance
        7. Mutual Fund Advantages and Risks
        8. Summary
        9. References
        10. Questions
      14. Chapter 14: Portfolio Performance and Value-at-Risk
        1. Nature and Purpose of the Performance Evaluation
        2. Measuring Performance
        3. Methodologies for Evaluating Performance
        4. The Fama–French Three-Factor Model
        5. Performance Attribution Models
        6. Value-at-Risk (VaR)
        7. Methods for Calculating VaR
        8. Stress Testing and Back Testing
        9. Summary
        10. References
        11. Questions
    10. Part Two: Money and Capital Markets
      1. Chapter 15: The Banking System
        1. On the Nature of Central Banking
        2. On the Nature of Money
        3. Fractional Banking and the Money Multiplier
        4. The Central Bank
        5. The Reserves Market: Demand and Supply of Reserves
        6. The Regulatory and Supervisory Role of the Central Bank
        7. The Debate over the Role of the Central Bank
        8. The Theory of Two Interest Rates
        9. Central Banking and Financial Markets
        10. Central Bank in Islamic Finance
        11. Summary
        12. References
        13. Questions
      2. Chapter 16: The Demand for Money
        1. Motives for Holding Money
        2. Demand for Money as Affected by the Rate of Interest
        3. The Baumol–Tobin Model of Money Demand
        4. Equilibrium in the Market for Money
        5. Demand for Money as Influenced by the Price Level
        6. Other Determinants of the Demand for Money
        7. Effects of Changes in the Money Market
        8. The Quantity Theory of Money and Money Demand
        9. The Cambridge Transaction Approach
        10. The Restatement of the Quantity Theory as a Demand for Money Function
        11. Summary
        12. References
        13. Questions
      3. Chapter 17: Capital Markets and the Macroeconomy
        1. Financial Crises and Approaches for Recovery
        2. The Income-Expenditure Sector
        3. The Monetary Sector
        4. Macroeconomic Equilibrium
        5. Macroeconomic Equilibrium under Keynesian Assumptions
        6. Classicists’ Approaches to Recovery from Depression
        7. Islamic Approaches to Recovery from Depression
        8. Stagflation and Post–2008 Crisis Unemployment
        9. Summary
        10. References
        11. Questions
    11. Part Three: Regulations and Institutions of Capital Markets and Islamic Structured Finance
      1. Chapter 18: Institutions and Regulations of Capital Markets
        1. Regulatory Legislation
        2. The Securities and Exchange Commission
        3. The U.S. Commodity Futures Trading Commission
        4. The Stock Market
        5. Brokerage Firm
        6. Online Trading: A Form of Discount Brokerage
        7. Investment Advisers
        8. Clearinghouses
        9. Central Securities Depository
        10. Investment Banks
        11. Investment Companies
        12. Investment Funds
        13. Mutual Funds
        14. Exchange-Traded Funds
        15. Hedge Funds
        16. Money Market Funds
        17. Structured Investment Vehicles
        18. Summary
        19. References
        20. Questions
      2. Chapter 19: Institutions and Instruments of Islamic Capital Markets
        1. The Sharia Advisory Council
        2. Islamic Modes of Financing and Islamic Instruments
        3. Islamic Funds
        4. Islamic Derivatives Markets
        5. Guidelines on the Offering of Islamic Securities
        6. Summary
        7. References
        8. Questions
      3. Chapter 20: Sukuks
        1. Asset Securitization
        2. Structure and Legal Documentation of Islamic Private Debt Securities
        3. Types of Sukuk Structures
        4. Sukuk Issuance in Practice
        5. Risks Underlying Sukuks’ Structures
        6. Managing the Financial Risks of Sukuk Structures
        7. Summary
        8. References
        9. Questions
      4. Chapter 21: Islamic Structured Products
        1. Structured Finance
        2. Definition of Structured Products
        3. Features of Structured Products
        4. Risks and Benefits of Structured Products
        5. Types of Structured Products
        6. Financial Engineering of Structured Products
        7. Islamic Structured Products
        8. Challenges for Islamic Structurers
        9. Examples of Structured Products
        10. Summary
        11. References
        12. Questions
    12. About the Author
    13. Index