Contingent Claim Approach for Pricing of Sovereign Sukuk for R&D Financing in Indonesia

ABSTRACT

This paper proposes a model for financing research and development activities with a focus on the pricing of sukuk as the source of financing. Pricing scenarios are conducted using the real options approach consisting of continuity, abandonment, and substitution scenarios. The results establish possible future values of products depending on the risk value obtained by converting the project’s technology readiness level as well as the scenario chosen. The results show consistency with the risk-return tradeoff, and the complete continuity scenario provides the closest results to the yields of existing project-based sukuk.

KEY WORDS:

• contingent claim
• Islamic finance
• pricing
• R&D financing
• sukuk

JEL:

• G12
• G13

Notes

1. Special thanks to Madhu Kalimipalli of Wilfrid Laurier University, who made a comparison between sukuk and CLO at the Asian Finance Association International Conference, 24–26 June 2014 in Bali.

Additional information

Funding

This work was supported by the Contingent Claim Asset Pricing Competitive Grant, Universitas Indonesia [Year 2017].