Options trading islamic finance

Understanding The Theory and Practice of Islamic Forex Trading | Finance Magnates


options trading islamic finance

Trading in financial markets is a lucrative option because the returns are usually instant and significant. However, Forex trading and trading in the stock markets is a controversial topic. People are concerned about whether investing and trading in these markets is halal or haram. Thus the total value that must be paid for the option (on ounces) is $ Alternatively a counterparty may sell this option to the market maker for a total amount of $options trading islamic finance. Try out our FREE morning trial no credit card required! Investing in stock OPTIONS halal? or haram? or ambigious. Ask Question Asked 5 years, 11 if in the non-Islamic options market the contracted stock does not exist at the beginning of and during the period of the contract (i.e. the stocks were short-sold) then the whole transaction basically becomes pure gambling. I have been trading.

Application of Options In Islamic Finance - afehahulewoz.tk

This website uses cookies to improve services, analyse traffic to our site, deliver content and provide tailored ads. By using this site, you agree to this use. See our Cookie Policy. Option Contract In Islamic Finance Option Contracts An option is a contract that gives buyer the right, but not the options trading islamic finance, to purchase or to sell a specific quantity of an asset for a set price at the specific date in the future.

In exchange for this right, the buyer pays a price, known as a premium, to the seller. Two basic kinds of option exist: a call option, and a put option. The call option gives the buyer the right to buy the asset by a certain date for a specific price.

The put option gives the buyer the right to sell the asset by a certain date in the future for a specific price. For example, if A believes that stock of company X is going to increase in value.

A can either pay full price and buy the stocks, or pay a fraction of the price i. If the price increases A can benefit either way. If the stock decreases in value, A can let options lapse. Thus, A does not bear any loss more than the premium. This is an example of call option right to buy.

For an example of put option, imagine B is worried that the value of her stock is going to decrease. She can either sell her stocks or buys put options. If the price decreases, She can sell her stocks for the set price; her only cost is the premium. If the price increases, she can simply let options lapse. These are example of simple options. To hedge their risks businesses often combine put options and call options.

Combined options are commonly used to hedge against currency fluctuation. They are also used to hedge against commodity price fluctuation as well. The premiums in combined options can be set up in a way so they cancel each other.

For example, if C is worried that the fluctuation in the value of USSD may affect its ability to perform a contract, C can hedge her risk by buying a combined option—basically she will buy both put and call options, options trading islamic finance. If the value of USSD increases the profit she makes from the put options—being able to buy for the less than market price—will set off her loss from the call options, and vice versa.

Stand-alone options are regularly sold in the security markets. These options are not sold separately rather they are embedded in another product. An example of embedded option is cancellation option. Some products have a built-in cancellation feature that enables one party buyer or seller to cancel the transaction without any further obligations. The cost of premium in this kind of transaction is not paid separately rather is part of the price of product. Benefits of Options Options, like other derivatives, can be used for risk management and hedging purposes.

As a hedging instrument, options provide their holders with the protection against adverse move in the price for a low cost, as was the case options trading islamic finance the examples discussed above. Option is also used as a tool for arbitrage. Arbitrage is a process of taking advantage of price difference between the markets. Another use of options is to speculate on the direction of the market.

Options are commonly used as speculative tools, options trading islamic finance. Speculation is the practice of exposing oneself to risk and hoping to profit from doing so. Options are widely used in conventional financial markets for all three purposes. Options trading islamic finance majority of Muslim jurists have found conventional options to be impermissible.

There is an influential minority, on the other hand, that opined options to be permissible. Muslim jurists have interpreted maysir to mean any form of game of chance, and gambling. In options, they argue, buyers and seller have diametrically opposite expectations. The gain of one party results from the loss of other party.

Depending on the actual outcome one party wins at the expense of other. Therefore, they argue, it is an example of maysir. Gharar The prohibition against speculative transactions that entail excessive risk-taking and uncertainty, known as gharar, has been drawn from the Sunnah using inductive reasoning. The majority has argued that options are used to speculative on the direction of the market, so they entail excessive risk-taking, and uncertainty.

Obaidullah, for example, argued, options trading islamic finance, in the options the benefits are tied to random changes in the direction of a market that are highly uncertain; this makes the practice, in essence, gambling [7].

As it can be seen the prohibition of options on the ground of gharar is closely connected to the prohibition of maysir. However, unlike later, which is a certain prohibition, the former is not a blanket prohibition because all form of business involves a degree of risk-taking, and uncertainty.

Therefore, the question is how much risk and uncertainty is too much? Iqbal [8], Obaidullah [9], El Diwanny [10], have argued, when the practice turns to a zero-sum game it is tantamount to gambling, therefore, is impermissible. In other words, when speculation is used to create wealth, options trading islamic finance, like musharkah partnershipthe practice is permissible, on the other hand, when its only purpose is to transfer wealth, it turns to a zero-sum game, which is gambling.

The pro-options minority argues that options are useful instruments; therefore, they should not be prohibited based on maysir and gharar.

The presence of speculators enhances liquidity in the market. Options trading islamic finance absence of speculators, the businesses cannot pass on their risks. In short, they argue Islamic businesses, like their conventional counterparts, need to manage risks, and prohibiting options, will make it impossible for them to do so. In absence of a clear prohibition, if the goal is permissible—they argue managing risk is a permissible goal—the instrument ought to be permissible.

Premium There is also disagreement among jurists as to whether the right transferred in an option can be sold. That is whether the premium paid in options is permissible. The majority argues that those rights are not tangible assets; therefore, they cannot be subject to purchase or sale. Al-Khiyarat are based on the Sunnah, and juristic opinions. Pro-option jurists argue that as Khiyar al-shart is a creature of contract, the contract can options trading islamic finance provide for payment in exchange for such right.

Here the distinction between stand-alone and embedded options is relevant. The Khiyar al-shart like other Al-Khiyarat, are embedded in a contract of sale or lease, and are not separately saleable rights. This kind of embedded options a right of cancelation or validation embedded in a contract is generally considered permissible by all jurists as long as it is not independently priced.

If the contract provides for an independent financial right in exchange for the Al-Khiyarat embedded optionmajority considers such options impermissible. Approving SB may base their opinion on the minority view or may issue an independent fatwa. It is a down payment on the price of contract; therefore, if the buyer does not terminate the contract within specified time, the payment will become part of the purchase price.

However, if the buyer terminates the contract—ostensibly because the market price has moved in adverse direction—the buyer will only forfeit the earnest to the seller, options trading islamic finance. As such it is not option per se; however, IFIs have used it as the main vehicle to structure options. In the former IFIs uses a murabaha to receive fee whilst in the later direct fee is paid. Murabaha is an Islamic transaction that is widely used by IFIs to avoid the prohibition of riba usury where the IFIs purchases an asset from the customer or from a party identified by the customer, then sales it to the customer at a marked-up price with deferred payment.

It is setup to have the same effect as an interest-bearing loan without violating the prohibition of riba. The IFIs undertake a unilateral undertaking to exchange Currency 1 with Currency two at a pre-agreed rate in the future. On the same date, the IFIs will execute a murabaha whereby a payment is made on the spot unlike ordinary murabaha which is executed with deferred payment. So, in effect, the IFIs receive a fee. The only difference is that in the former instead of executing a murabaha the buyer of option pays the fee directly, options trading islamic finance.

Unlike conventional bonds that merely confer ownership of debts, sukuk confers a share of undivided ownership of assets, along with commensurate cash flow and risk. Option is usually used in sukuk structures to redeem the principal to the investor upon maturity or in the event of default.

Options trading islamic finance in sukuk the investor owns the underlying asset or a percentage of it, she is vulnerable to the adverse change in the price of asset.

Options are used to protect the investor from this risk. The sukuk structure varies. In a simplified ijarah lease transaction, the issuer IFIs will sell the underlying asset to the SPV special purpose vehicle and then lease it back.

The structure guarantees that at the maturity, or in the options trading islamic finance of default, the principal value of the underlying asset is options trading islamic finance to the investor. This kind of Sukuk structure is an embedded option; the premium is negotiated along with the original transaction, options trading islamic finance, and is not separately paid. Structured Products Structured product is a principal protected investment product if hold until maturity.

A conventional structured product consists of element: capital protection part and enhanced yield part. The enhanced yield part uses a call or put option; the return due on the investment depends on the performance of underlying currency exchange rate, options trading islamic finance. For example, an investor places money in dirham through a commodity murabaha; the IFIs offers the investor higher return than ordinary deposit; in return, the IFIs has a right to return the principal and profits in dirham or an alternative currency.

The parties agree, ex ante, on the alternative currency and the conversion rate, options trading islamic finance. In effect, it combines commodity murabaha and option, options trading islamic finance. Conclusion Islamic businesses need to manage the risk, too.

Some jurists, who are in the minority, on options trading islamic finance other hand, argue that the options are useful hedging tools; denying access to options harms Islamic businesses, and halts economic development.

The practice in Islamic finance industry is partial toward the minority; it is highly likely that in the near future options acquire wide acceptance among jurists.


Islamic Financial Trading - afehahulewoz.tke


options trading islamic finance


Thus the total value that must be paid for the option (on ounces) is $ Alternatively a counterparty may sell this option to the market maker for a total amount of $options trading islamic finance. Try out our FREE morning trial no credit card required! Financial Market Trading and Islamic Finance. The majority of Islamic scholars agree that options have features of speculation and gambling. In addition, the investor (second party) doesn’t intend to hold the asset (which is generally considered crucial for an investment to be sharia-compliant). According to critic of Islamic finance, Mahmoud A. El-Gamal, one way the Islamic finance industry gets around prohibitions on the use of options is to use conventional banks/financers as a "buffer" between the haram income and its sharia obedient customers — employing conventional banks as partners or advisers and paying them with the haram gains from derivatives.