Electronic Journal of Applied Statistical Analysis: Decision Support Systems and Services Evaluation EJASA:DSS (2012). Vol 3, Issue 1, 59 – 74 e-ISSN 2037-3627, DOI 10.1285/i2037-3627v3n1p1 © 2012 Università del Salento, SIBA http://siba-ese.unile.it/index.php/ejasa_dss 59 HEDGING INSTRUMENTS IN CONVENTIONAL AND ISLAMIC FINANCE Muslima Zahan * , Ron S. Kenett Department of Applied Mathematics and Statistics, University of Turin, Italy Received 30 January 2010; Accepted 08 September 2011 Available online 17 December 2011 Abstract: The paper presents instruments of hedging and risk management applied in both conventional and Islamic banking market places. We compare the framework, models and instruments of financing in these two banking environments and explore the speculative behavior of Islamic Banking. In this research, we refer to information from different papers, proceedings and websites to identify characteristic aspects of these two banking systems and the related risk mitigation (hedging) instruments. We show that hedging for risk management in these two banking systems are actually quite similar, although the concept, framework, goals and objectives, as well as risks, are different in their respective business activities. Further investigation is needed to identify why Islamic banks replicate the conventional banking hedging instruments and how the Islamic hedging instruments are effectively based on double rules and regulations such as Sharia and Local Government, as well as four-fold tax obligations (Zakat and Government Tax). Keywords: Basel III, risk management, hedging, conventional banking, Islamic banking and finance, swap. 1. Introduction A hedge is a position established in one market usually in the context of one’s commercial activity, in an attempt to offset exposure to the price risk of an equal but opposite obligation or position in another market. Banks and other financial institutions use hedging to control their asset-liability mismatches so that the maturity matches between long, fixed-rate loans and short- term (implicitly variable-rate) deposits. Investors and intermediaries purchase different types of * muslima.zahan@gmail.com