Islamic Economics Institute

Wednesday Academic Dialogue (21)

 

Options as AnIslamic Instrument for Hedging

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Dr. Mosa Adam Eisa

National Commercial Bank, Jeddah, Saudi Arabia

Wednesday 15-02-2017 (16-05-1438H)

Abstract

It is well known that the going opinion amongst Sharia scholars is the prohibition of options due to excessive contractual uncertainty (Gharar), selling what you do not own, and selling  rights that are not suitable to be the subject matter of a contract of exchange.

In this paper we show that an option is not a contract of sale, rather it is a unilateral commitment to sell  where all of the details of the commitment are known and agreed upon. Those who argue that options are characterized by excessive uncertainty may have mixed between the concept of contractual uncertainty and the concept of financial risk, and in the opinion of the author, although options are subject to financial risk, they are not subject to contractual uncertainty. Since the Sharia prohibits transactions on the basis of excessive contractual uncertainty and not on the basis of financial risk, this paper argues that options are permissible if used for permissible means, such as hedging.



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