The market risk or price risk for the investors can

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The market risk or price risk for the investors can be mitigated if a third party makes a unilateral promise to buy the commodity at a predetermined price at a future time period. Since the SPV representing investors need not participate in the market, it would be insulated from price risk. This third party may be one of the prospective customers of the company. The unilateral promise is binding on this customer. Once the rights resulting from the promise are transferred to the SPV, it assumes the role of seller to the third party customer at the specified future date. Sukuk 15
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Sukuk-Al-Salam One of the Shariah conditions relating to bai-salam that is quite relevant for creation of Sukuk is the requirement that the purchased goods are not supposed to be sold before actual possession at maturity. Prior to delivery, the Sukuk holder is not allowed to dispose of his instruments by sale as this amounts to selling the underlying commodity before actual possession. This constraint renders the Salam instrument illiquid and hence, somewhat less attractive to investors. Sukuk 16
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Sukuk-Al-Istisna SPV representing investors becomes seller-contractor-manufacturer of an asset to a buyer (say, the government) and uses back-to-back istisna for creation of the facility. In other words, the SPV takes upon itself the legal responsibility of getting the facilities constructed, and sub-contracts the work to manufacturers/contractors. The deferred price that the buyer will pay may be in the form of sukuk that are an evidence of indebtedness whose total face-value exactly equals the total deferred price. These sukuk may have different maturities to match the installment plan that has been agreed upon by the two parties. They represent buyer’s debt and hence, Shariah precludes sale of these debt certificates to a third party at any price other than the face value of such certificates. Sukuk 17
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Usefulness of Different Models Various methods of creating fixed income debt securities based on the classical Islamic contracts of BBA, Murabahah, Ijarah, Salam and Istisna that are free from riba. Of all these, salam-based instruments seem to be too restrictive in scope. Istisna-based instruments are quite useful for financing large infrastructure projects. While Murabahah and BBA based instruments are useful for financing trade. Both however, involve sale of debt or receivables and hence suffer from the restrictions on their negotiability and no secondary market. Compared to these, Ijarah-based instruments are free from all these constraints. Ijarah seems to offer maximum flexibility in terms of negotiability, management of price risk. Sukuk 18
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Asset Securitization Investment bankers may also create securities through a process called asset securitization.
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