Arifah Azna Baharin, Ruhaini Muda, Ibrahim Abiodun Oladapo, Sharifah Faigah Syed Alwi
In a setting of a dual banking system, the study aims to provide empirical evidence on the establishment of the link between the pricing of Islamic foreign exchange option and the commodity murabahah trading as reflected through Crude palm oil trading volume from the derivatives market in Malaysia. The study made use of weekly data from January 2012 until December 2016 of the Malaysian derivatives market. The data set was obtained from the Bloomberg database and the annual report of Bursa Suq al-Sila’. This study employed the Autoregressive Distributed Lag (ARDL) approach to co-integration. Findings shows that there is no indication to establish the link between commodity murabahah transactions through Crude palm oil trading volume with variation of Islamic foreign exchange option price. The determination of Islamic foreign exchange option price has been dominance by the competitive market practices and leveraging the existing framework, in particular in a setting of dual banking system. The study provides empirical evidence on the price determination of the Islamic foreign exchange option from a dual banking system and emerging market.