Decision making between Islamic and conventional hedging contracts: An agent-based simulation approach


Amina Dchieche
International University of Rabat, Rabat Business School, Morocco – BEAR Lab


Purpose – Hedging contracts, especially financial derivatives are very powerful tools that allow investors not only to avoid risk but also to generate profit. The purpose of this work is to study the behavior of investors having the choice between Islamic and conventional hedging contracts, we choose to compare the European Call Option and its Islamic counterpart the Waad. Design/methodology/approach – The paper is an agent-based simulation including three agents: investors, Islamic banks, and conventional banks. The investors can either choose the conventional contract or the Islamic one to hedge the price risk or to invest. The decision making is based on five parameters, namely the rate of religiosity, the expected investment return rate, the ethics rate, the tolerance to high risk rate, the tolerance to high price rate and the neighborhood influence. Practical implications – The main implication of this work is that the agent-based simulation allows studying the non-quantifiable factors that can influence investors while choosing between Islamic and Conventional contracts for Hedging. Results show that the Islamic hedging contract is likely more used than the conventional one. Originality/Value – Most previous studies concentrated on comparison between conventional and Islamic Banking adoption using qualitative or quantitative methods, otherwise the agent-based simulation is barely used in the field of Islamic finance. But this current study, is an attempt to study the behavior of investors having the choice between Islamic and conventional hedging contracts using agent-based simulation.

Keywords: Islamic Finance, Agent-based simulation, Derivatives, Call Option, Waad, Behaviorism.

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