FINANCE

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KembaraXtra – Islamic Derivatives: Option vs Call Option vs Stock Option vs Warrant (Note Form)


🔹 1. Basic Definitions
  • Option (General)
    • Right to buy or sell an asset
    • Includes:
      • Call option
      • Put option


  • Call Option
    • Right to buy shares at fixed price


  • Stock Option (Employee)
    • Right for employees to buy company shares
    • Given as compensation


  • Warrant
    • Right to buy shares from company
    • Issued to investors


🔹 2. Similarities
  • ✔ Right (not obligation)
  • ✔ Fixed price (strike/exercise price)
  • ✔ Expiry period
  • ✔ Profit when price rises (for call-type rights)


🔹 3. Key Differences
 
✔ Nature
  • Option → General term
  • Call option → Type of option (buy only)
  • Stock option → Employee-based call option
  • Warrant → Company-issued right


✔ Who Issues It
  • Option / Call option → Market (investors)
  • Stock option → Company (to employees)
  • Warrant → Company (to investors)


✔ Source of Shares
  • Option / Call option → From other investors
  • Stock option → From company
  • Warrant → From company (new shares created)


✔ Tradability
  • Option / Call option → ✔ Tradable
  • Stock option → ❌ Not tradable
  • Warrant → ✔ Tradable


✔ Purpose
  • Option / Call option → Trading / hedging
  • Stock option → Employee incentive
  • Warrant → Raise capital


🔹 4. Key Insight
 
👉 Think of it like this:
  • Option = big category
  • Call option = type of option
  • Stock option = employee version of call option
  • Warrant = company-issued call-like instrument


🔹 Simple Summary
  • Option → buy or sell right
  • Call option → right to buy
  • Stock option → employee right to buy
  • Warrant → investor right to buy from company


🔹 Final Exam Line
 
👉 “Options are general derivative contracts, call options are rights to buy, stock options are employee-based call rights, and warrants are company-issued rights to purchase newly created shares.”
 

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KembaraXtra – Islamic Derivatives: Making Money with Stock Options (Note Form)


🔹 1. What is “Spread”?
 
👉 Spread = Stock Price (S) − Strike Price (K)
 
✔ It shows:
  • How much profit per share


✔ Example
  • Strike price (K) = $10
  • Stock price (S) = $25
 
👉 Spread = 25 − 10 = $15 per share


🔹 2. Types of Option Positions


✔ In-the-Money (ITM)
  • Condition: S > K
  • Spread = Positive
 
👉 Option has value
 
✔ Example:
  • S = $25, K = $10 → Profit exists


✔ Out-of-the-Money (OTM)
  • Condition: S < K
  • Spread = Negative
 
👉 Option has no value
 
✔ Example:
  • S = $8, K = $10 → No profit


✔ At-the-Money (ATM)
  • Condition: S = K
  • Spread = 0
 
👉 No gain, no loss


🔹 3. Call vs Put (Simple Logic)
 
✔ Call Option
  • Profit when: S > K
  • Buy low (K), sell high (S)


✔ Put Option
  • Profit when: S < K
  • Sell high (K), buy low (S)


🔹 4. Private vs Public Company Options


✔ Public Company
  • Shares are traded in market
  • Easy to:
    • Sell shares
    • Realize profit


✔ Private Company
  • No active market for shares
 
👉 Profit only when:
  • Company buys back shares
  • IPO happens
  • Company is sold


🔹 5. Key Issue (Private Company)
 
👉 Even if option is profitable:
  • ❗ You may not be able to sell shares immediately
  • Must wait for liquidity event


🔹 6. Key Insight
 
👉 Profit in options depends on:
  • Difference between market price and strike price
  • AND ability to sell the shares


🔹 Simple Summary
  • Spread = S − K
  • ITM → profit
  • OTM → no profit
  • ATM → neutral
  • Private company → profit may be delayed


🔹 Final Exam Insight
 
👉 “The profitability of stock options depends on the spread between the stock price and exercise price, with options being in-the-money, out-of-the-money, or at-the-money, while realization of gains depends on market liquidity.”
 

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KembaraXtra – Islamic Derivatives: Why Share Price Can Rise Even When a Company Makes Losses


🔹 Key Idea
 
👉 Share price is based on future expectations, not just current performance
 
✔ So even if a company makes losses today,
👉 price can rise if investors expect future improvement


🔹 1. Future Growth Expectations 📈
 
👉 Investors care about:
  • Future profits
  • Business expansion
  • New opportunities


🔸 Example
  • Company reports loss today
  • But announces:
    • New technology
    • Expansion plan
 
👉 Investors expect future profit
 
✔ Share price increases


🔹 2. Temporary Loss (Not Serious)
 
👉 Loss may be due to:
  • One-time event
  • Investment in growth
  • Economic downturn
 
👉 Investors think:
  • “This is temporary”
 
✔ So they continue buying


🔹 3. Strong Company Fundamentals
 
👉 Even with losses, company may have:
  • Strong brand
  • Large market share
  • Good management
 
👉 Investors trust long-term potential
 
✔ Demand stays high → price rises


🔹 4. Speculation and Market Sentiment
 
👉 Sometimes price rises due to:
  • Market hype
  • News or rumors
  • Investor optimism
 
❗ This can be risky (closer to speculation)


🔹 5. External Factors
 
👉 Price may rise due to:
  • Industry growth
  • Government support
  • Economic recovery
 
✔ Not just company performance


🔹 6. Simple Case Example
  • Company makes RM1 million loss
 
👉 But:
  • Launching new product
  • Expected high future revenue
 
👉 Investors buy shares
 
✔ Price rises from RM5 → RM7


🔹 Islamic Finance Insight
 
👉 Acceptable if:
  • ✔ Based on real business expectations
  • ✔ Linked to real economic activity
 
❌ Problematic if:
  • Pure speculation
  • No real basis


🔹 Simple Summary
  • Share price ≠ current profit only
  • It reflects future expectations
 
👉 Loss today + strong future → price can rise


🔹 Final Exam Insight
 
👉 “Share prices may increase despite current losses if investors expect future profitability, as valuation is based on anticipated performance rather than present earnings alone.”
 

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Published on
KembaraXtra – Islamic Derivatives: Warrants vs Call Options (Simplified Explanation)


🔹 What is a Warrant?
 
👉 A warrant is a financial instrument that gives the holder:
  • The right (not obligation)
  • To buy shares directly from a company
  • At a fixed price (exercise price)
  • Within a certain time


🔹 Key Features of Warrants
  • Right to buy company shares
  • Issued by the company itself
  • Has:
    • Exercise price
    • Expiry date
    • Number of shares


🔹 Similarity with Call Option
 
👉 Warrants are similar to call options because:
  • Both give the right to buy shares
  • Both have:
    • Fixed price
    • Expiry date
  • Buyer is not obligated


🔹 Case Example (Warrant)
  • Exercise price = RM5 per share
  • Current price = RM7
 
👉 You exercise warrant:
  • Buy at RM5
  • Market value = RM7
 
👉 Profit = RM2 per share ✅


🔹 Key Difference: Warrant vs Call Option
 
🔸 1. Who Issues It?
  • Warrant → issued by the company
  • Call option → created by investors/traders


🔸 2. Where Shares Come From?
  • Warrant:
    • Shares come from the company
    • New shares are created
  • Call option:
    • Shares come from other investors
    • No new shares created


🔸 3. Effect on Company
  • Warrant:
    • Company receives money
    • Number of shares increases
  • Call option:
    • Company not involved
    • No change in total shares


🔹 Important Insight
 
👉 Warrants affect:
  • Company capital
  • Share ownership
 
👉 Call options affect:
  • Only investor trading


🔹 Simple Summary
  • Warrant = company-issued right to buy new shares
  • Call option = market-traded right to buy existing shares
  • Both give right, not obligation


🔹 Shariah Insight (Brief)
  • Warrants:
    • ⚠️ Still debated
    • Must avoid speculation
  • Call options:
    • ❌ Generally not permissible
 

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KembaraXtra – Islamic Derivatives: Islamic View on Warrants, Embedded Options & Gharar (Simplified Explanation)


🔹 Key Issue
 
👉 The main concern is whether warrants (embedded options) involve:
  • ❌ Gharar (uncertainty)
  • ❌ Maisir (gambling/speculation)


🔹 1. Why Scholars Are Concerned
 
❌ Uncertainty About Future Price
  • Warrants depend on:
    • Future stock price
  • No one knows:
    • Whether price will go up or down
 
👉 Investor decision:
  • Exercise or not → uncertain


❌ Speculation Risk
  • Some investors:
    • Use warrants only to bet on price movement
 
👉 This leads to:
  • Gambling-like behavior (maisir)


❌ Gharar Fahish (Excessive Uncertainty)
  • According to scholars:
    • Options involve high uncertainty
  • No clarity on outcome
 
👉 Considered problematic in Shariah


🔹 2. Legal Maxim Applied
 
👉 “Dar’ul mafasid muqaddam min jalbil masalih”
 
Meaning:
👉 “Preventing harm is more important than gaining benefit”
 
✔ So if:
  • Warrants lead to speculation
👉 They may be prohibited


🔹 3. Minority / Flexible View
 
👉 Some scholars allow embedded options (like warrants) under conditions:
 
✔ Conditions
  • Must be part of a real contract
  • Cannot be freely traded separately
  • Obligations must remain between parties
 
👉 This reduces:
  • Speculation
  • Market trading abuse


🔹 4. Why Some Scholars Support Them
 
✔ Hedging Purpose
  • Options can be used to:
    • Reduce risk, not gamble
 
👉 Example:
  • Protect against price fluctuation


✔ Maslahah (Public Interest)
  • Modern economy is:
    • Uncertain
    • Volatile
 
👉 Options help:
  • Businesses manage risk
  • Protect financial stability


🔹 5. Balanced View (Very Important)
 
👉 Scholars say:
  • ❌ If used for speculation → not allowed
  • ✔ If used for hedging and properly structured → may be allowed


🔹 6. No Direct Classical Equivalent
 
👉 Futures, options, warrants:
  • Are modern financial instruments
  • Not found in classical fiqh
 
👉 So:
  • Must be evaluated using:
    • Islamic principles
    • Benefits vs harms


🔹 Simple Summary
  • Warrants = embedded options
  • Main issue = gharar + speculation
  • Majority → ❌ not allowed
  • Minority → ⚠️ allowed with conditions


🔹 Final Exam Insight
 
👉 “The permissibility of warrants and embedded options depends on balancing their speculative nature against their hedging benefits, with Shariah emphasizing the prevention of harm over potential gain.”
 

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KembaraXtra – Islamic Derivatives: Sources of Shariah and Their Role in Islamic Finance (Simplified Explanation)


🔹 Key Idea
 
👉 All financial and commercial activities in Islamic finance must:
 
✔ Fully comply with Shariah principles
👉 Shariah acts as a complete guide for life, including business and finance


🔹 What is Shariah in Finance?
 
👉 Shariah is:
  • Islamic law
  • A system that determines:
    • What is permissible (halal)
    • What is prohibited (haram)


🔹 Main Sources of Shariah
 
Shariah rules are developed from four main sources:


📖 1. The Qur’an
  • The holy book of Islam
  • Contains guidance from Allah
 
👉 Only a small portion (~3%) relates directly to legal rules


🕌 2. Sunnah (Hadith)
  • Sayings and actions of Prophet Muhammad (PBUH)
  • Provides:
    • Explanation of Qur’an
    • Practical application


🤝 3. Ijma (Consensus)
  • Agreement among qualified scholars
 
👉 Used when:
  • No direct rule in Qur’an or Sunnah
 
✔ Helps unify opinions


🧠 4. Qiyas (Analogy)
  • Logical reasoning based on existing rulings
 
👉 Used for:
  • New financial products (e.g., derivatives)


🔹 Role in Islamic Finance
 
👉 These sources help scholars:
  • Develop rules for:
    • Banking
    • Investments
    • Contracts
 
✔ Ensure:
  • No riba (interest)
  • No gharar (uncertainty)
  • No maisir (gambling)


🔹 Importance of Ijma in Modern Finance
 
👉 Modern finance introduces new issues:
  • Futures
  • Options
  • Sukuk
 
👉 Scholars work together to:
  • Reach consensus (ijma)
  • Provide clear rulings


🔹 Role of Key Institutions
 
✔ Important Organizations
  • OIC Fiqh Academy
  • AAOIFI (Accounting & Auditing Organization for Islamic Financial Institutions)
  • IFSB (Islamic Financial Services Board)


🔸 What They Do
  • Standardize Islamic finance rules
  • Issue guidelines and resolutions
  • Help global acceptance
 
✔ Improve consistency in the industry


🔹 Challenges
  • Different opinions still exist
  • Some critics question:
    • Interpretations
    • Modern applications
 
👉 But overall:
✔ Consensus has improved the system


🔹 Simple Summary
  • Shariah guides all financial activities
  • Based on:
    • Qur’an
    • Sunnah
    • Ijma
    • Qiyas
 
👉 Modern institutions help apply these rules to today’s financial systems


🔹 Final Exam Insight
 
👉 “Islamic finance is governed by Shariah principles derived from the Qur’an, Sunnah, ijma, and qiyas, with modern institutions playing a key role in standardizing and applying these principles to contemporary financial practices.”
 

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embaraXtra – Islamic Derivatives: Common Stock in Islamic Finance (Mudarabah Concept Explained)


🔹 Key Idea
 
👉 In Islamic finance, common stock is viewed as similar to:
 
✔ Mudarabah (profit and loss sharing)
 
👉 Meaning:
  • Investors share in profit and risk, not guaranteed return


🔹 1. What is Common Stock in Islam?
 
👉 When you buy shares:
  • You become a partial owner of the company
  • You are not just a lender


🔸 Your Rights as Shareholder
  • Share in profits (dividends)
  • Vote in company decisions 🗳️
  • Elect directors
 
✔ You are a real business partner


🔹 2. Profit and Loss Sharing (Mudarabah Concept)
 
👉 Shares follow the idea of:
  • ✔ Profit → you earn dividends
  • ❌ Loss → share value decreases
 
👉 No guaranteed return
 
✔ This matches Islamic principle:
👉 “Profit comes with risk”


🔹 3. Risk Bearing (Very Important)
 
👉 Shareholders bear residual risk
  • If company performs well → profit ✅
  • If company fails → loss ❌


🔸 Case Example
  • You invest RM1,000 in a company
 
👉 If business grows:
  • You earn dividends + capital gain
 
👉 If business fails:
  • Your investment may reduce
 
✔ You share both gain and loss


🔹 4. Position in Case of Company Liquidation
 
👉 If company closes:
  1. Creditors are paid first
  2. Remaining assets go to shareholders
 
👉 Shareholders are:
  • Last to be paid
 
✔ Shows true ownership risk


🔹 5. Why Shares Are Allowed in Shariah
 
Islamic scholars accept shares because:
  • ✔ Represent real ownership
  • ✔ Linked to real economic activity
  • ✔ No fixed guaranteed return
  • ✔ Based on risk-sharing


🔹 6. Historical Insight
 
👉 Some scholars argue:
  • Stock-like concepts existed among medieval Muslim traders
  • Later developed in Western economies


🔹 7. Institutional Approval
 
👉 Important milestone:
  • OIC Islamic Fiqh Academy (1993)
✔ Approved common stocks as permissible


🔹 8. Modern Development (Since 1990s)
 
👉 Growth of Islamic capital market due to:
  • Expansion of Islamic finance
  • Institutions like:
    • Islamic Development Bank (IDB)
    • AAOIFI
    • IFSB
 
✔ Development of Shariah-compliant instruments


🔹 Simple Summary
  • Shares = ownership in real business
  • Based on:
    • ✔ Profit and loss sharing
    • ✔ Risk participation
  • Approved in Islamic finance


🔹 Final Exam Insight
 
👉 “Common stocks are permissible in Islamic finance as they represent ownership in a real business and operate under profit and loss sharing principles similar to Mudarabah.”
 

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Published on
KembaraXtra – Islamic Derivatives: Common Stock in Islamic Finance (Mudarabah Concept Explained)


🔹 Key Idea
 
👉 In Islamic finance, common stock is viewed as similar to:
 
✔ Mudarabah (profit and loss sharing)
 
👉 Meaning:
  • Investors share in profit and risk, not guaranteed return


🔹 1. What is Common Stock in Islam?
 
👉 When you buy shares:
  • You become a partial owner of the company
  • You are not just a lender


🔸 Your Rights as Shareholder
  • Share in profits (dividends)
  • Vote in company decisions 🗳️
  • Elect directors
 
✔ You are a real business partner


🔹 2. Profit and Loss Sharing (Mudarabah Concept)
 
👉 Shares follow the idea of:
  • ✔ Profit → you earn dividends
  • ❌ Loss → share value decreases
 
👉 No guaranteed return
 
✔ This matches Islamic principle:
👉 “Profit comes with risk”


🔹 3. Risk Bearing (Very Important)
 
👉 Shareholders bear residual risk
  • If company performs well → profit ✅
  • If company fails → loss ❌


🔸 Case Example
  • You invest RM1,000 in a company
 
👉 If business grows:
  • You earn dividends + capital gain
 
👉 If business fails:
  • Your investment may reduce
 
✔ You share both gain and loss


🔹 4. Position in Case of Company Liquidation
 
👉 If company closes:
  1. Creditors are paid first
  2. Remaining assets go to shareholders
 
👉 Shareholders are:
  • Last to be paid
 
✔ Shows true ownership risk


🔹 5. Why Shares Are Allowed in Shariah
 
Islamic scholars accept shares because:
  • ✔ Represent real ownership
  • ✔ Linked to real economic activity
  • ✔ No fixed guaranteed return
  • ✔ Based on risk-sharing


🔹 6. Historical Insight
 
👉 Some scholars argue:
  • Stock-like concepts existed among medieval Muslim traders
  • Later developed in Western economies


🔹 7. Institutional Approval
 
👉 Important milestone:
  • OIC Islamic Fiqh Academy (1993)
✔ Approved common stocks as permissible


🔹 8. Modern Development (Since 1990s)
 
👉 Growth of Islamic capital market due to:
  • Expansion of Islamic finance
  • Institutions like:
    • Islamic Development Bank (IDB)
    • AAOIFI
    • IFSB
 
✔ Development of Shariah-compliant instruments


🔹 Simple Summary
  • Shares = ownership in real business
  • Based on:
    • ✔ Profit and loss sharing
    • ✔ Risk participation
  • Approved in Islamic finance


🔹 Final Exam Insight
 
👉 “Common stocks are permissible in Islamic finance as they represent ownership in a real business and operate under profit and loss sharing principles similar to Mudarabah.”
 

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KembaraXtra – Islamic Derivatives: Why Share Price Decreases When a Company Incurs Losses


🔹 Key Idea
 
👉 Share price reflects the value of the company
👉 When a company incurs losses → its value decreases
 
✔ Therefore, share price falls


🔹 1. Lower Profit = Lower Value
 
👉 Investors buy shares to earn:
  • Dividends
  • Future growth


🔸 When Company Makes Loss
  • No profit to distribute
  • Dividends may be reduced or stopped
 
👉 Investors expect less return
 
✔ Demand for shares decreases → price falls


🔹 2. Negative Market Expectations
 
👉 Loss signals problems like:
  • Weak management
  • Poor sales
  • Economic issues
 
👉 Investors think:
  • Future performance will be worse
 
✔ So they sell shares


🔹 3. Supply and Demand Effect
 
👉 When many investors sell:
  • Supply of shares ↑
  • Demand ↓
 
👉 Price automatically drops


🔹 4. Reduction in Company Net Worth
 
👉 Loss reduces:
  • Company assets
  • Retained earnings
 
👉 So:
  • Company becomes less valuable
 
✔ Share price reflects this lower value


🔹 5. Risk Becomes Higher
 
👉 Loss means:
  • Business is riskier
 
👉 Investors require:
  • Higher return for risk
 
✔ If not achievable → they sell → price drops


🔹 6. Simple Case Example
  • You buy shares at RM10
 
👉 Company incurs losses
  • No dividends
  • Poor future outlook
 
👉 Investors sell → price drops to RM7
 
✔ Loss in company → loss in share value


🔹 Islamic Finance Insight
 
👉 This is acceptable in Islam because:
  • ✔ Profit and loss sharing
  • ✔ Real business performance
  • ✔ No guaranteed return
 
👉 Loss is part of ownership risk


🔹 Simple Summary
  • Loss → lower profit
  • Lower profit → lower demand
  • Lower demand → lower price
 
👉 Share price falls because the company becomes less valuable


🔹 Final Exam Insight
 
👉 “Share prices decline when companies incur losses because investors expect lower future returns, leading to reduced demand and a decrease in the company’s perceived value.”
 

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KembaraXtra – Islamic Derivatives: Islamic View on Capital Markets (Stock vs Derivatives Market)


🔹 1. Types of Capital Markets
 
👉 Modern financial system has two main markets:
 
✔ 1. Stock Market
  • Trading of shares (equity ownership)
  • Linked to real businesses


❗ 2. Commodity / Derivatives Market
  • Includes:
    • Futures
    • Options
    • Warrants
 
👉 Based on contracts and price movements


🔹 2. Role of Islamic Stock Market
 
👉 Islamic finance ensures the stock market:
 
✔ Transfers Funds Efficiently
  • From surplus units (investors)
  • To deficit units (companies needing funds)
 
✔ Supports real economic growth


✔ Encourages Productive Investment
  • Funds go into:
    • Businesses
    • Projects
    • Production
 
👉 Not idle or speculative activities


✔ Respects Investor Preferences
 
Investments must consider:
  • Risk level
  • Expected return
  • Investment period
 
✔ All within Shariah rules


✔ Follows Ethical Principles
  • No riba (interest)
  • No gharar (excessive uncertainty)
  • No haram activities


🔹 3. Why Derivatives Are Problematic
 
👉 Instruments like:
  • Stock index futures
  • Options
  • Warrants
 
Are:
  • Complex
  • Often speculative


❌ Issues in Shariah
  • High uncertainty (gharar)
  • Gambling-like elements (maisir)
  • No real asset exchange


🔹 4. Scholarly Opinions
 
👉 Islamic scholars:
  • Have different interpretations
  • Debate permissibility


✔ Majority View
  • Derivatives → generally not allowed


⚠️ Minority View
  • May allow:
    • Structured forms
    • Hedging purposes
    • Embedded options


🔹 5. Key Insight
 
👉 Islamic finance supports:
  • ✔ Real economy (stock market)
 
But is cautious about:
  • ❌ Financial speculation (derivatives)


🔹 Simple Summary
  • Stock market → ✔ generally acceptable
  • Derivatives market → ❌ controversial
 
👉 Must comply with:
  • Shariah principles
  • Ethical business rules


🔹 Final Exam Insight
 
👉 “Islamic capital markets promote equity-based investment and real economic activity while subjecting derivative instruments to strict scrutiny due to their speculative and uncertain nature.”
 

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