This research has attempted to present an overview of options and how it operates in the conventional markets as well as a Shariah analysis. Options are derivatives used for multiple reasons, primarily hedging and speculation for income. Majority of the contemporary scholars are of the view that conventional options are not Shariah compliant. The arguments and reasoning of most scholars revolve around the presence of Gharar (contractual uncertainty), the element of Maysir (gambling) and the option itself not being a valid tradeable item in Islamic law. It is essentially the trading of risk itself. If it is the element of choice in a contract, there are Shariah compliant alternatives which give the traders a choice such as Arbun, Khiyar and Hamish Jiddiyyah. However, all such alternatives cannot be traded on a secondary market. A minority opine on the use of payments for the Wa’d, however, that is against the majority understanding including the AAOIFI Shariah standards. Thus, to develop an identical Shariah compliant product to options is very difficult due to the nature of options. Further research is required to develop products which are truly Shariah compliant and acceptable for risk management in Islamic finance.
The full research paper and other research papers authored by Mufti Faraz Adam can be downloaded from: