Pricing Mechanism For Sukuk
And Bond Structures
Malaysia’s First Bond Pricing Agency
Meor Amri Meor Ayob
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Bond Market Growth in Malaysia
The Malaysian bond market has seen tremendous growth over the past years
ƒ Private Debt Securities (PDS) emerged
as the largest source of private sector
financing in the aftermath of the 1997
financial crisis
ƒIt was reported that Malaysia’s Islamic
bond market grew over 80% over the last
5 years, with a 96% y-o-y growth in long
term PDS market for the year 2007
ƒMalaysia accounts for two thirds of
global Islamic bonds outstanding in
2007
96% y-o-y
growth in
Islamic
PDS
ƒBinariang GSM’s Senior Islamic bond
issuance worth RM20 billion is the
largest corporate bond issue in Malaysia
yet
* Long term PDS are notes that are above 1 year in tenure and would naturally exclude commercial papers, BNM notes, repos and other related papers
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d
Bond Market Growth in Malaysia
Activity in the secondary market has been consistent
ƒ Despite the growth in bond
issuances, liquidity and activity in the
secondary market has not grown in
tandem
ƒ Liquidity has been observed to be active
for better credit quality papers
ƒ Key issue in the lack of liquidity is price
and information transparency
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d
Bond Market Growth in Malaysia
A number of Islamic concepts have been applied in the structuring of Islamic bonds
ƒ Islamic concepts applied in various
bonds :
9Al Bai Bithaman Ajil
9Al Qardhul Hasan
9Bai' Bi Al-Taqsit
9Bai Dayn
9Bai Dayn & Murabahah
9Bai-Al-Einah
9Ijarah
9Istisna
9Mudharabah
9Murabahah
9Musyarakah
ƒ Combinations include:
9Al Bai Bithaman Ajil & Bai Einah
9Mudharabah & Murabahah
9Murabahah & Bai Al Dayn
9Murabahah & Musyarakah
9Murabahah & Ijarah
9Istisna & Mudharabah
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d
The Role of Bond Pricing
The Solution
Problem
Less than 1% are traded, where are the
prices for the remaining 99%?
The Need
Daily valuation of bond portfolios for NAV
calculation and portfolio valuation
9The BPA evaluates about 2,000+ bonds that
are not traded on any given day, based on the
market prices
9The BPA needs to employ reliable database
and evaluation methodology. This
methodology MUST be transparent and
consistent
Current method
Quotes from brokers or banks, a few via
internally generated models – bias?
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d
Benefits of Bond Pricing for the Bond Market
Revitalizing
Revitalizingthe
the
Secondary
Secondary
Market
Marketfor
forBonds
Bonds
9BPA valuation approved by the SC may revitalize the bond market using mark-to-market
prices as benchmark by publicly announcing them
9Marking-to-market system provide strategy alternatives to traditional hold-to-maturity
strategies.
Revitalizing
Revitalizingthe
the
Primary
PrimaryMarket
Market
for
forBonds
Bonds
9From an origination and underwriting perspective, primary level pricing becomes
challenging especially for lower credits
9Mark-to-market pricing on previously issued corporate bonds can promote new corporate
bond issues by functioning as benchmarks for primary level pricing
Promoting
PromotingNew
New
Product
Product
Development
Development
9BPA’s transparency in the methodologies being used will spur the evolution of the bond
market with further advance pricing methodologies
9When advance pricing methodologies are established, it will encourage more bond
offerings and more active trading of these products in the secondary market.
Improving
Improvingthe
the
Soundness
Soundnessofof
Financial
Financial
Institutions
Institutions
9Providing price discovery may assist in financial institutions' compliance to international
standards such as IAS 39 and Basel II requirements.
9Effectiveness of risk management will be further enhanced as the valuation process will be
consistent and not arbitrary
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d
Delivery Channels
For 2000+ stocks delivered via a .csv (excel) file daily at 6.00 pm
BOND CODE
MO060001
MS03001S
MS03002H
MZ98005A
MS04003H
MY050003
MX060002
DE060266
KV96101E
PS93004H
KV95001T
GG04001F
GI03001W
GI04003N
GK04002F
CI02014T
CI02025A
CI03007S
CK02006N
DN97062W
DN97099H
DS97120S
QK00001W
QI03001A
ISIN CODE
MYBMO0600019
MYBMS03001S9
MYBMS03002H0
MYBMZ98005A5
MYBMS04003H7
MYBMY0500036
MYBMX0600028
MYBDE0602668
MYBKV96101E2
MYBPS93004H4
MYBKV95001T3
MYBGG04001F7
MYBGI03001W1
MYBGI04003N5
MYBGK04002F9
MYBCI02014T5
MYBCI02025A1
MYBCI03007S0
MYBCK02006N0
MYBDN97062W6
MYBDN97099H9
MYBDS97120S5
MYBQK00001W8
MYBQI03001A5
BOND NAME
VALUE DATE MTM PRICE MTM YIELD LAST PRICE LAST YIELD LAST DATE DURATIONCONVEXITY
MGS 1/2006 4.262% 15.09.2016
17-Jan-07
103.89
3.78
103.85
3.78
16-Jan-07
7.79
72.77
MGS 1/2003 4.41000% 29.01.2018
17-Jan-07
105.42
3.8
0
0
8.58
89.86
MGS 2/2003 4.24000% 07.02.2018
17-Jan-07
103.9
3.8
0
0
8.66
91.06
MGS 5/1998 8.000% 20Y 30102018
17-Jan-07
139.47
3.81
0
0
8.23
87.15
MGS 3/2004 5.734% 30.07.2019
17-Jan-07
118.76
3.84
118
3.91 11-Dec-06
9.04
103.67
MGS 3/2005 4.837% 15.07.2025
17-Jan-07
110.58
4.02
110.59
4.02
10-Jan-07
12.43
199.78
MGS 2/2006 4.709% 15.09.2026
17-Jan-07
108.74
4.06
108.75
4.06
16-Jan-07
12.78
216.26
CAGN 1/2006 364D 25.05.2007
17-Jan-07
98.7
3.76
98.65
3.76
12-Jan-07
0.35
0.24
KLIA 0.000% 30.01.2016 PN
17-Jan-07
128.29
3.99
128.27
3.99
15-Jan-07
6.65
56.4
YTL POWER 10.000% 30.10.2008 PN
17-Jan-07
110.58
3.82
0
0
1.64
3.61
KLIA 7.750% 17.01.2015 PN
17-Jan-07
126.63
3.85
121.06
5.45 04-Mar-02
6.21
47.52
GII 1/2004 0.00000% 15.06.2007
17-Jan-07
98.62
3.43
98.42
3.7
08-Jan-07
0.4
0.32
GII 1/2003 0.00000% 31.03.2008
17-Jan-07
95.84
3.57
95.35
3.61 27-Nov-06
1.18
1.98
GII 3/2004 0.00000% 29.10.2009
17-Jan-07
90.4
3.66
86.93
4.15 24-May-06
2.73
8.81
GII 2/2004 0.00000% 30.09.2011
17-Jan-07
84.1
3.72
83.85
3.71 14-Dec-06
4.62
23.6
SMC 14/2002 23.04.2007
17-Jan-07
100.13
3.62
99.25
4.82 28-Dec-05
0.26
0.14
SMC 25/2002 22.08.2007
17-Jan-07
100.14
3.68
100.05
3.98
04-Oct-02
0.57
0.62
SMC 7/2003 11.04.2008
17-Jan-07
99.67
3.78
99.7
3.73 01-Dec-06
1.18
2.01
SMC 6/2002 26.02.2009
17-Jan-07
101.2
3.82
99.91
4.45 28-Dec-05
1.97
4.99
PERWAJA 0.000% 31.07.2007 PN
17-Jan-07
102.5
3.52
107.47
3.59 29-Nov-05
0.51
0.52
TENAGA 0.000% 01.10.2007 PN
17-Jan-07
102.86
3.81
103.73
3.81
30-Oct-06
0.67
0.79
TENAGA 0.000% 01.10.2012 PN
17-Jan-07
119.85
4.33
119.63
4.74
04-Apr-06
4.57
25.99
KHA1/00 1.02B 0-CP 7YR 20/3/2007
17-Jan-07
99.4
3.57
98.41
3.65
10-Oct-06
0.17
0.06
KHA1/03 1B 0-CP 5Y 18/6/08
17-Jan-07
94.96
3.68
93.87
3.8
11-Oct-06
1.39
2.63
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What Is A Bond Pricing Agency
BPAs are new entities and currently only three countries use the BPA framework
Korea
Thailand
Egypt (in development)
Mexico
Malaysia
Indonesia (in development)
Mexico
9Two price vendors under
the purview of Banco De
Mexico
Malaysia
9Bondweb Malaysia Sdn Bhd
Thailand
9Thai Bond Market Association (SRO)
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Korea
9Korea Bond Pricing
9KIS Pricing, Inc
9NICE Pricing Services, Inc
Bond Pricing Regulations
BPA Registration Requirements
As per SC Guidelines on the Registration of Bond Pricing Agencies dated 25 January 2006 strict requirements to qualify covering:
Methodology and Process :
Audited
Pricing performance :
3 month market acceptance test
Expertise :
Fit and proper persons
System:
Adequate security and backup
Shareholders :
No controlling party
Minimum paid up capital :
RM 10 million
Professional indemnity insurance : RM 10 million
Bond Pricing Agency Malaysia has met and exceeded these requirements, and was appointed
as the first registered Bond Pricing Agency on 18th April 2006
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The Nature of Bond Pricing Business
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Introducing Bond Pricing Agency Malaysia Sdn Bhd
Bond Pricing Agency Malaysia Sdn Bhd (BPAM) was established in 2004
9 With participation from:
ƒMARC and RAM on data and technical
support
ƒSC and BNM in observer and advisory role
ƒMarket community (buy/sell side, brokers)
via
“Bottom Up” approach
9 Adhered to strict SC requirements to qualify as
BPA:
ƒAudited methodology and process
ƒThree months market acceptance test
ƒRM10 million minimum paid up capital and
professional indemnity insurance
ƒNo controlling shareholders
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Compliance and Quality Assurance
• Bond Pricing Agency Malaysia (BPAM) is currently the only registered Bond Pricing
Agency (BPA) with the Securities Commission
• BPAM meets and exceeds the requirements set out in the Guidelines on the
Registration of Bond Pricing Agencies dated 25 January 2006
The Securities Commission issued Guidance Note 15 dated 15 December 2006 pursuant to the
Guidelines on Unit Trusts Funds, which outlined the policy for Unit Trusts on use of BPA prices:
“Funds investing in Ringgit-denominated bonds shall value bond portfolios on daily basis using
fair value prices quoted by a Bond Pricing Agency (BPA) registered with the SC. “
• BPAM is already supporting the implementation of the Basel II, IAS 39 and Risk Based
Capital requirement for banks and insurance companies
• Therefore, BPAM is fully compliant to meet the needs of Unit Trust Management
Companies, Asset Managers and Financial Institutions with regard to the provision of
Fair Value Bond Prices
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BPAM Clients
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BPAM Clients
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Pricing Process
BPAM’s Bond Pricing Services
9 BPAM provides valuations on a daily basis at INDIVIDUAL bond level
9 A comprehensive data collection, validation, pricing and dissemination process is in place to
ensure consistent and market neutral valuations
9 The bond pricing process is transparent and uses global standard pricing models
9 The models are customized to meet the unique needs of the Malaysian market
9 BPAM prices unlisted MYR bonds (Conventional and Islamic). For now we do not price short
term papers, unrated bonds, loan stocks and listed bonds
9 We incorporate a market feedback mechanism in the event where there are disputes or queries
on the prices
9 Intimate local knowledge of the instruments and market structure is vital to ensure credibility of
the BPA
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d
Pricing Methodology
Bond Pricing Approach – Current Industry Practice and the Assumptions
YTM
YTMMatrix
Matrix/ /
Curve
CurvePricing
Pricing
Individual
Individual
Quotation
Quotation
Approach
Approach
Model
Model
Approach
Approach
(Mark
(MarkTo
To
Model)
Model)
Four common market practices are used in conducting bond pricing.
BPAM employs the hybrid approach
Approach Type
Pricing Method
Granularity
YTM Matrix / Curve
Pricing
Quote Driven
Curve Pricing
Individual Quotation
Approach
Quote Driven
Individual Bond
Model Approach
Theoretical
Individual Bond
Hybrid Approach
Hybrid
Individual Bond
Hybrid
Hybrid
Approach
Approach
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Pricing Methodology
BPAM’s Pricing Methodology – An Overview
Bond Price = f ( Benchmark Rates
Y
i
e
l
d
+
Credit Spread )
Derivation of benchmark rate
Credit Risk
Liquidity
Risk
Risk
Term to Maturity
Segmentation Cube
Quotations
Individual Bonds
Trades
Measuring the
Market Price
Of Risk
Individual Bond
Valuation
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Pricing Process
Price All Bonds
Pricing for un-traded or rarely traded bonds
9 Obtain a base spread from the past real transaction
data
9 Track the change of spread over time
9 Estimate the spread of the bond relative to
changes in the yield curves and other peer group
Y
i
e
l
d
Yield curve(AA)
20bp
Spread(AA)
Real Transaction
Evaluation Yield
20bp
15bp
Spread of specific bond
Base yield curve
(AAA)
15bp
Ev
o
ati
alu
ate
D
n
Term
to M
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d
atur
it y
Pricing Methodology
Bond types identified and priced by BPAM in the MYR market:
™Callable Amortizing Bonds with Secondary Notes ™Callable Stepping Bonds
™Callable Stepping Amortizing Bonds
™Discount Bonds
™Convertible Stepping Bonds
™Bullet Bonds
™Callable Bonds with Secondary Notes
™Fixed Rate Bonds
™Convertible Bonds with Secondary Notes
™Amortizing Bonds
™Callable Bonds
™Convertible Bonds
™Exchange Bonds
™Bond with Warrants
As of April 2008:
™Fixed Rate ABS
Total stocks in the market:
2693
™Callable ABS
™Fixed Rate MBS
Priced by BPAM:
1908
™Callable MBS
™Stepping FRB
™Floating Rate Notes
™Floating Amortizing Notes
™Floating Rate ABS
™Floating Rate MBS
™Bond with Secondary Notes
™Amortizing Bonds with Secondary Notes
™Callable Amortizing Bonds
™Stepping Amortizing Bonds
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Pricing Methodology
Price All Bonds
Apply relevant bond type price formula
Eg1 : Fixed coupon bonds with regular period
1
c
×F×
F
100
f
+
− AI
∑
1
( k −1+ D 2 )
y
y
1
( n −1+ D 2 )
D
k =1
D
(1 +
× )
(1 +
× )
100 f
100 f
n
Eg2 : Fixed coupon bonds with short first coupon
c
1 FIF
c
1
×F× ×
×F×
n
F
f
E
f
100
100
+∑
+
− AI
2
2
D
D
y
y
y
1
1 ( k −1+ E )
1 ( n −1+ D 2 E )
E
k =2
(1 +
× )
(1 +
× )
(1 +
× )
100 f
100 f
100 f
Notation
f
c
F
y
AI
D
D2
n
E/U
Eg3 : Fixed coupon bonds long first coupon
c
c
1
1 LIF
×F×
×F× ×
n−1
F
f
f U
100
100
+
+
− AI
∑
LIF D 2
LIF
D
2
y 1 (k −1+ D)
y 1 (n−1+ U + U )
y 1 (n−1+ U +D2U )
k =1
× )
(1 +
(1+
(1+
× )
× )
100 f
100 f
100 f
FIF / LIF
* Price computed using yield derived from the
(credit spot rate at discount period t + individual spread)
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Descriptions
Coupon payment frequency in a year
Coupon rate
Face amount = Notional
Yield *
Accrued Interest
No. of days in one regular coupon
period
No. of days between the value date and
the next coupon Date
Last coupon period
No. of days between the pseudo issue /
real last coupon date and the real first
coupon / pseudo maturity date (short
first / last coupon)
No. of days between the pseudo issue /
pseudo last coupon date and the
pseudo first coupon / pseudo maturity
date (long first coupon)
No. of days between the real issue date
/ real last coupon and the real first
coupon / real maturity date
(Short First / Last Coupon Bond)
No. of days between the real issue /
pseudo last coupon date and the
pseudo first coupon / real maturity date
(Long First / Last Coupon Bond)
Bond Pricing, Current Practice and Pricing Issue
Sophisticated pricing methodologies are not used due to the lack of transparent data.
Advanced pricing methodologies are still in primitive development.
Example: Pricing of option embedded bonds – current practice
I
I
I
P
I
I
First Call Date
I
P
I
P
Interest
Payment
Principle
Payment
Legal Maturity
c
1
×F×
F
100
f
P=∑
+
− AI
y 1 ( k −1+ D 2 D )
y
( n ' −1+ D 2 )
1
k =1
D
(1 +
× )
(1 +
× )
100 f
100 f
n'
where n' = first call date
9 Current market practice is to price option embedded bonds to the first call
9 Cash flow after first call is discarded
9 Assumption is flawed
9 There are also no difference in pricing of American, European and Bermudan option
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d
Bond Pricing, Current Practice and Pricing Issue
Theoretical Method in Pricing of Bonds with Embedded Options
Example: Pricing of option embedded bonds – One Factor Hull & White Trinomial Tree
1) The price of option embedded bond can be computed by backwardation through an interest rate tree as follows:
P(T+1;up)
At time T, the non-exercise price can be computed by:
Pnon−exer (T ) = exp(−r × Δt ) × [ P(T + 1; up) * prob(up)
+ P(T + 1; mid ) * prob(mid )
P(T)
P(T+1;mid)
+ P(T + 1; dw) * prob(dw)]
If the option is call and the exercise price at T is C, then the price of
option bond at T can be determined as follows:
P(T+1;dw)
P(T) = min [ C, Pnon−exer (T ) ]
So, the price of option embedded bond is P(0).
2) Hull and White suggested a two-stage method to generate the interest rate tree using the basic formula:
dr = [θ (t ) − ar ]dt + σdz
θ (t )
: the coefficient
of long term mean
a
: mean speed
σ
: the volatility
of short term interest rate
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Bond Pricing, Current Practice and Pricing Issue
Theoretical Method in Pricing of Bonds with Embedded Options
Example: Pricing of option embedded bonds – One Factor Hull & White Trinomial Tree
2) Hull and White suggested a two-stage method to generate the interest rate tree.
a) The first stage in building a tree for this model is to build a tree for a
*
variabler
7 a 2 j 2 Δt 2 − 3ajΔt
+
6
2
1
2 2
Pm = − − a j Δt 2 + 2ajΔt
3
1 a 2 j 2 Δt 2 − ajΔt
Pd = +
6
2
Pu =
that is initially zero following
*
*
the process dr = − ar dt + σdz .
1 a 2 j 2 Δt 2 − ajΔt
+
6
2
2
Pm = − a 2 j 2 Δt 2
3
1 a 2 j 2 Δt 2 + ajΔt
Pd = +
6
2
Pu =
Assumption: θ (t ) = 0 , r (0) = 0
*
*
First Stage Model: dr = − ar dt + σdz
*
*
Parameter Setting: ΔR = σ 3Δt , t = iΔt , R = jΔR
0.184
0.816
j max : Minimum integer between
and
, j min = − j max
aΔt
aΔt
Tree expansion: If the short-term interest reaches the two boundaries
j max
Pu , Pm ,(Pd
j min
or goes down
, then the probabilities to up, middle, down
1 a 2 j 2 Δt 2 + ajΔt
+
6
2
1
Pm = − − a 2 j 2 Δt 2 − 2ajΔt
3
7 a 2 j 2 Δt 2 + 3ajΔt
Pd = +
6
2
Pu =
) will change.
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d
Bond Pricing, Current Practice and Pricing Issue
Theoretical Method in Pricing of Bonds with Embedded Options
Example: Pricing of option embedded bonds – One Factor Hull & White Trinomial Tree
2) Hull and White suggested a two-stage method to generate the interest rate tree.
*
b) The second stage in the tree construction is to convert the tree r into a tree for r . This is accomplished by
displacing the nodes on the
*
r-tree
so that the initial term structure is exactly matched. The approach is to
*
set the interest rates on r-tree at time iΔt to be equal to the corresponding interest rates on r -tree plus
α (iΔt ) while keeping the probabilities the same. The procedure is to calculate αs iteratively so that the initial
term structure is matched.
*
Define α (t ) = r (t ) − r (t ) Æ dα (t ) = [θ (t ) − aα (t )]dt
α can be calculated as follows:
Qi , j : Present value of security, which gives $1 at (i,j) node ( Q0, 0 = 1 ),α 0 = initial Δt -period interest rate,
given by term structure)
Qi +1, j = ∑ Qi , k p (k , j ) exp[−(α i + kΔR)Δt ]
k
where p ( k , j ) : transition probability from node (i,k) to node (i+1,j) ( Pu , Pm , Pd )
Pi +1 = ∑ Qi , j exp[ −(α i + jΔR ) Δt ] Æ α i =
ln ∑ Qi , j e − jΔRΔt − ln Pi +1
j
Δt
where P is the price computed from the current term structure of interest rate
j
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d
Bond Pricing, Current Practice and Pricing Issues Islamic
Valuation method of Sukuks are indifferent to conventional bonds in market practice.
Syariah principles conformed via product structuring
Fixed Payment Bond
Conventional
I
I
I
P
I
P
Interest
Payment
Principle
Payment
Islamic
SN
SN
Fixed Payment Bond Formula
1
c
×F×
n
F
100
f
+
− Accrued Interest
P=∑
2
D
y 1 ( k −1+ D )
y 1 ( n−1+ D 2 D )
k =1
(1 +
(1 +
× )
× )
100 f
100 f
Notation
f
c
F
y
D
D2
n
P
Descriptions
Payment frequency in a year
Cash flow rate
Face amount = Notional
Yield
No. of days in one regular coupon period
No. of days between the value date and the next payment date
Last payment period
Clean Price
9 Secondary Note in Islamic structure acts as the fixed profit payment as
agreed in the contract.
SN
SN
PN
Conventional valuation formula used
PN
Secondary
Note
Primary
Note
9 Cash flow rate in Islamic structure derived as the ratio between the
secondary note amount and the primary note amount
9 Primary amount is the face amount
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d
Bond Pricing, Current Practice and Pricing Issues - Islamic
Islamic and conventional bonds are fundamentally different in both structure and thus
valuation
Islamic Bond Differences from Conventional Bonds
ƒ Not an exchange of paper or money but an exchange of
Syariah approved assets
ƒ In principle, Islamic bond structure is similar to asset
securitisation
Many more unaccounted
Islamic features in current
market valuation
ƒ Inclusion of asset volatility
ƒ Differing market perception resulting in differentiated trading
behaviour – liquidity, risk premium, etc.
ƒ Term structure of asset
ƒ No imposition of interest but uses secondary notes as profit
payments
ƒ Floating rate mechanism for the forward rate
agreement in the unconditional and
irrevocable purchase of asset at maturity
ƒ Profit earned through financial consideration for the
exchange by applying Syariah principles
ƒ Prepayment risk modeling
ƒ Additional risks that are uncommon in conventional bonds
such as religious and regulatory risks
ƒ Counterparty risk modeling
Rather than relying on the performance of the underlying assets, Islamic bonds are currently
priced as per their conventional counterparts and almost arbitrarily.
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d
Bond Pricing, Current Practice and Pricing Issues - Islamic
Example – KL Sentral Sdn Bhd (KLSSB) Musyarakah Venture with Kuwait Finance House
(KFH) as option writer
Market prices KLSSB as a fixed
payment bond to legal maturity
disregarding asset issues.
Investors
KLSSB issues
Sukuk and
receives
proceeds in
return
1
5
Proceeds
from PU for
Sukuk
redemption
and profit
payments
Trustee
ƒ Trustee
overseeing the
Musyarakah
Bond has pricing issue on asset pricing
Cashflow payments in arrears via
aggregated project revenue
Unconditional and irrevocable
purchase of assets
ƒ Musyarakah
partners
appoint
KLSSB as the
Project Agent
KLSSB
KLSSB
(as Wakeel to Investors)
Put
Option
4
Purchase Undertaking (PU)
KFH
ƒ Put
Option
terms and
conditions
ƒ Forward pricing of assets require a forward rate
benchmark of asset class
ƒ Consideration must be taken for counterparty risk at the
end of the contract
Bond has pricing issue on asset’s embedded option
IHH
Distributable profit to be
shared semi-annually
based on an agreed profit
sharing ration of 99%:1% to
KLSSB and Sukukholders
3
2
Stake of Musyarakah
partners based on their
capital contribution of 74:26
from KLSSB (in kind) and
Sukukholders (cash)
IH
IHL
I0
ILH
IL
….
ILL
Musyarakah Venture to sell
Project Lands
ƒ Asset volatility and term structure of asset class.
Eg equity industry index volatility
ƒ Asset data greatly needed
ƒ Optionality of the put/call feature
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d
Bond Pricing, Current Practice and Pricing Issues - Islamic
In asset pricing, many considerations must be taken in the cash flow structure and risk
exposure
Cash Flow
Sale
Price
Delivery
ƒ Discount
ƒ Immediate
ƒ Negotiated
ƒ Mark up
ƒ Deferred
ƒEnd of
Period
Lease
Payment
Price
Delivery
ƒ Advance
ƒ Discount
ƒ Immediate
ƒ Advance
ƒ Discount
ƒ Advance
ƒ Staggered
ƒEnd of
Period
ƒ Negotiated
ƒ Mark up
ƒ Deferred
ƒEnd of
Period
ƒ Staggered
ƒEnd of
Period
ƒ Negotiated
ƒ Mark up
ƒ Staggered
ƒEnd of
Period
Risk Exposure to Asset
Asset
Entity
Property
Equity
Usufruct
ƒ Fixed
ƒ Fixed
ƒ On Issuer
ƒ Floating
ƒ Floating
ƒOn the
Business
Payment
Price
Payment
9Breakdown necessary to avoid mismatch in the Islamic
bond’s risk consideration
9Sukuk contract is the cosmetic of the asset
9Key challenge is on data aggregation on
specific asset classes and using these
information in pricing models
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d
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Tel: +603 2772 0888 Fax: +603 2772 0808 Email : [email protected]
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