Indices — practice questions

Correct answer: D. Clauses 5/1, 5/2 and 6/1 to 6/3: Indices may be used to gauge market changes, to judge managers’ performance against them, to estimate systematic risk, and for forecasting; they may serve as benchmarks for comparing funds and for linking a manager’s remuneration, an agent’s bonus or a Mudarib’s bonus to results. Trading in indices or profiting from their changes through payments on the mere occurrence of index readings, without buying or selling real assets, is prohibited, as are options on indices and contracts on the index contracts’ multiplier.

Correct answer: B. Clause 5/3: It is permissible to use an index such as LIBOR, or a share or commodity price index, as a basis for determining the profit in a Murabahah pledge, provided the contract is concluded on a specific profit that does not vary with subsequent changes in the index (see Clause 4/6 of Shari’ah Standard No. (8)). Resetting the Murabahah profit after conclusion would make the price uncertain, whereas the index’s origin as a conventional benchmark does not in itself prohibit its use as a reference.

Correct answer: A. Clauses 5/4 and 5/5: Rules and arrangements for money-based employment contracts may provide for wage indexation, i.e. periodic adjustment of wages according to changes in the price level as determined by the relevant bodies. However, where unpaid wages accumulate and become a debt, the Shari’ah rulings on debts apply, so the debt itself cannot be increased by indexation. Similarly, an index may be used to determine the variable portion of Ijarah rental representing the return (see Clause 5/2/3 of Shari’ah Standard No. (9)).