FINANCE

Published on
KembaraXtra – Islamic Derivatives: Which Is More Profitable — Call Option or Put Option?


🔹 Short Answer
 
👉 Neither is always more profitable.
It depends on how the market moves.


🔹 Key Idea You Need to Fix
 
You said:
 
“Call option only buy at strike price”
 
⚠️ Actually:
  • Call option → buy at strike price, then you can sell at market price
  • Put option → buy at market price, then sell at strike price
 
👉 Both involve buying and selling, just in different order.


🔹 When Call Option Is More Profitable 📈
 
Use a call option when you expect price to go up.
 
Example:
  • Strike = RM4,000
  • Price rises to RM4,500
 
👉 Profit = RM500 − premium
 
✔ Big price increase → high profit


🔹 When Put Option Is More Profitable 📉
 
Use a put option when you expect price to go down.
 
Example:
  • Strike = RM4,000
  • Price drops to RM3,500
 
👉 Profit = RM500 − premium
 
✔ Big price decrease → high profit


🔹 Important Comparison
  • Call option profits from price increase
  • Put option profits from price decrease
 
👉 Profit depends on:
  • How much price moves
  • Direction of movement


🔹 Which One Gives More Profit?
 
👉 They can give the same profit if price moves equally.
 
Example:
  • Price goes up RM500 → call profit = RM500
  • Price goes down RM500 → put profit = RM500
 
✔ So they are symmetrical


🔹 The Real Difference
  • Call → bullish (expect price ↑)
  • Put → bearish (expect price ↓)
 
👉 The “more profitable” one is simply the one that matches market direction


🔹 Simple Summary
  • No option is always better ❌
  • Call = profit when price goes up 📈
  • Put = profit when price goes down 📉
  • Profit depends on correct prediction, not type
 

​
Picture
Published on
KembaraXtra – Islamic Derivatives: Option Contracts Under Shariah Law


🔹 What is an Option Contract (Reminder)
 
An option contract gives the buyer the right (not obligation) to:
  • Buy (call option) or
  • Sell (put option)
 
an asset at a fixed price (strike price) in the future, by paying a premium.


🔹 Shariah View on Option Contracts
 
👉 The majority of Muslim scholars consider conventional option contracts:
 
❌ Not permissible (non-Shariah compliant)


🔹 Main Reasons Why Options Are Not Allowed
 
1. Premium Without Real Countervalue
  • The buyer pays a premium just for a right
  • No actual asset or service is exchanged
 
👉 Considered similar to taking money without valid exchange


2. Gharar (Excessive Uncertainty)
  • Outcome depends on future price movements
  • High level of uncertainty
 
👉 Shariah prohibits excessive uncertainty in contracts


3. Maisir (Gambling-Like Behavior)
  • Profit depends on speculation
  • One party gains, the other loses
 
👉 Similar to gambling, which is prohibited


4. No Ownership of Underlying Asset
  • The buyer does not own the asset
  • The contract is about rights, not real goods
 
👉 Violates principle of ownership in trade


5. Trading of Pure Rights
  • Options involve buying and selling rights only
  • Not tangible assets
 
👉 Many scholars do not recognize this as a valid subject of sale


🔹 Any Different Opinions?
 
👉 Some minority scholars try to justify options using:
  • Concepts like ‘urbun (deposit sale)
 
But:
  • This view is not widely accepted


🔹 Islamic Alternatives
 
Instead of options, Islamic finance uses:
  • ✅ Salam → pay now, receive later
  • ✅ Istisna’ → contract for manufacturing
  • ✅ Wa’d (unilateral promise) → sometimes used in structured products


🔹 Simple Summary
  • Option contracts = right with premium
  • Contain:
    • ❌ Uncertainty (gharar)
    • ❌ Speculation (maisir)
    • ❌ No real ownership
  • 👉 Therefore, generally not allowed in Shariah
 

​
Picture
Published on
KembaraXtra – Islamic Derivatives: How Futures Contracts Work (Conventional vs Islamic)


🔹 1. How Conventional Futures Contracts Work
 
A futures contract is an agreement to buy or sell an asset at a fixed price on a future date.


🔸 Step-by-Step Process
  1. Agreement Today
    • Buyer and seller agree on:
      • Price
      • Quantity
      • Future delivery date
  2. Margin Deposit
    • Both parties deposit margin with a clearing house
  3. Daily Price Adjustment
    • Profits/losses updated daily (mark-to-market)
  4. Settlement
    • At expiry:
      • Either physical delivery, or
      • Cash settlement (most common)


🔸 Case Scenario (Palm Oil 🌴)
  • You agree to buy 1 ton of palm oil at RM4,000 in 1 month
 
👉 After 1 month:
 
If price = RM4,500
  • You gain RM500 ✅
 
If price = RM3,500
  • You lose RM500 ❌
 
👉 Usually, no real delivery — just profit/loss paid


🔹 Key Features (Conventional)
  • Both payment and delivery deferred
  • Heavy speculation
  • Often no ownership or delivery
  • Involves margin system


🔹 2. How Islamic “Futures-like” Contracts Work
 
👉 True conventional futures are not allowed in Islam
But Islam provides alternatives that achieve similar goals.


🔸 (A) Salam Contract (Main Alternative)
 
How it works:
  • Buyer pays full price upfront
  • Seller delivers goods later


🔸 Case Scenario (Palm Oil 🌴)
  • You pay RM4,000 now
  • Seller agrees to deliver 1 ton palm oil in 1 month
 
👉 After 1 month:
 
If market price = RM4,500
  • You benefit (bought cheaper) ✅
 
If market price = RM3,500
  • You still must accept goods ❌


🔸 (B) Istisna’ (For Manufacturing)
  • Used for custom goods (e.g., buildings, machinery)
  • Payment can be flexible (not fully upfront)
  • Delivery happens in the future


🔹 Key Differences (Simple)
  • Conventional futures
    • ❌ Both payment & delivery delayed
    • ❌ Speculation
    • ❌ No real ownership
  • Islamic (Salam)
    • ✅ Payment upfront
    • ✅ Real goods involved
    • ✅ Less uncertainty


🔹 Simple Summary
  • Conventional futures = agreement now, settle later (both sides delayed) → ❌ not Shariah-compliant
  • Islamic alternative (Salam) = pay now, receive later → ✅ allowed
 

​
Picture
Published on
KembaraXtra-Islamic Derivatives- Introduction
Futures contracts are agreements that allow producers and businesses to set prices for goods before they are delivered. This helps reduce different types of risk in trade.


These contracts also support better planning in agriculture, industry, and commerce. In addition, they make it easier to handle large volumes of trade.


According to Kamali (1999), trained brokers and agents usually help complete these contracts by following strict market rules in a controlled system. To ensure the contracts are reliable, a clearinghouse supervises trading activities and makes sure all traders can meet their obligations (Khan, 1988).

Picture
Published on
KembaraXtra-Islamic Derivatives -What is a Clearing House?
 
A clearing house is an organization that stands in the middle of a futures contract between the buyer and the seller. Instead of the two parties dealing directly with each other, the clearing house becomes the buyer to every seller and the seller to every buyer.
 
In the context of Islamic derivatives or futures contracts, the clearing house plays a similar role but must operate in a way that follows Shariah principles (such as avoiding excessive uncertainty and ensuring fairness).


Main Functions of a Clearing House
 
1. Guarantees the Contract
  • Ensures both parties fulfill their obligations.
  • Reduces the risk of one party failing to pay or deliver.
 
2. Reduces Counterparty Risk
  • Since the clearing house is in the middle, traders don’t have to worry about the other party defaulting.
 
3. Manages Margins (Security Deposits)
  • Requires traders to deposit funds (margin) to cover potential losses.
  • This ensures financial stability in the market.
 
4. Settles Transactions
  • Handles payments and delivery of goods (or cash settlement).
  • Makes sure trades are completed smoothly.
 
5. Monitors Trading Activities
  • Supervises the market to ensure rules are followed.
  • Maintains a fair and transparent trading system.
 
6. Maintains Market Stability
  • By managing risk and ensuring solvency, it helps prevent market disruptions.


Simple Summary
 
A clearing house is like a trusted middleman that:
  • makes sure trades are completed,
  • reduces risk,
  • and keeps the market safe and organized.
 

​
Picture
Published on
KembaraXtra – Islamic Derivatives: How a Clearing House Manages Margins (Futures Contracts)


🔹 How It Works (Step-by-Step)
 
1. Initial Margin (Starting Deposit)
  • When you enter a futures contract, you must deposit an initial margin.
  • This is not a payment for the asset — it’s a guarantee.
  • The clearing house holds this money.
 
You trade a futures contract → You deposit $1,000 as initial margin.


2. Daily Price Changes (Mark-to-Market)
  • At the end of each day, the clearing house checks the market price of the contract.
  • Profits and losses are calculated daily.
If the price moves:
  • In your favor → money is added to your account
  • Against you → money is deducted


3. Variation Margin (Daily Adjustment)
  • The daily gain or loss is called variation margin.
  • The clearing house updates your account every day.
Example:
  • Day 1: You lose $100 → your balance becomes $900
  • Day 2: You gain $50 → balance becomes $950


4. Maintenance Margin (Minimum Balance)
  • The clearing house sets a minimum level called maintenance margin.
  • If your balance falls below this level, action is required.
Example:
  • Maintenance margin = $800
  • Your balance drops to $750 → below the limit


5. Margin Call (Top-Up Required)
  • If your balance is too low, the clearing house issues a margin call.
  • You must deposit more money to bring it back to the initial level.
If you don’t:
  • Your position may be closed automatically to prevent further loss.


6. Final Settlement
  • When the contract ends, the remaining balance is returned (after all gains/losses are settled).


🔹 Simple Summary
 
The clearing house:
  • collects a deposit (margin)
  • updates it daily based on price changes
  • asks for more money if needed (margin call)
  • ensures all traders can meet their obligations


 

​
Picture
Published on

Kembaraxtra -Islamic Capital Market -Introduction to Islamic Private Equity
​
What is Private Equity?


  • Private Equity (PE) = Investment in private companies (or buying public companies to make them private).
  • Previously known mainly as venture capital.
  • Now a major part of corporate finance, especially in:
    • Mergers & Acquisitions (M&A)
    • Business restructuring
    • Growth financing
  • Considered a mainstream asset class, not a fringe investment.


2️⃣ Growth of Private Equity (Past 20 Years)


  • Rapid global expansion.
  • Provides competitive returns to:
    • Investors
    • Fund managers
    • Shareholders
    • Company managers
    • Debt financiers
  • Now widely accepted in both conventional and Islamic finance systems.


🕌 Islamic (Shari’ah-Compliant) Private Equity

3️⃣ Compatibility with Shari’ah

  • Private equity does NOT contradict Islamic law.
  • Can be structured in a Shari’ah-compliant way by:
    • Ethical screening of investment targets
    • Controlling debt-to-equity ratios
    • Controlling non-halal income ratios
    • Avoiding riba (interest), gharar (excessive uncertainty), and haram activitie



👉 Therefore, Islamic PE is a legitimate and accepted investment avenue.

4️⃣ Core Principles of Islamic Private Equity

Islamic private equity mainly operates using three key contracts:

🔹 A. Musharaka (Partnership)

  • Joint investment partnership.
  • All partners:
    • Contribute capital
    • Share profits (based on agreed ratio)
    • Share losses (based on capital contribution)

  • Used to pool investor funds into a partnership structure.


🔹 B. Mudarabah (Trust Financing)

  • One party provides capital (investors).
  • Other party provides management expertise (fund manager).
  • Profits:
    • Shared based on pre-agreed ratio.

  • Losses:
    • Borne by capital providers (unless due to manager negligence).

  • Used when the fund manager does not invest personal capital.


🔹 C. Wakalah (Agency)

  • Investors appoint fund manager as an agent.
  • Manager:
    • Manages fund on behalf of investors.
    • Earns agreed fee.

  • Used for fund management structure.


5️⃣ Fund Structure in Islamic Private Equity

  • Investors pool funds → via Musharaka or Mudarabah
  • Fund Manager:
    • May invest capital (Musharaka), or
    • Only manage (Mudarabah/Wakalah)

  • Agreement must clearly define:
    • Profit-sharing ratio
    • Risk-sharing mechanism
    • Roles and responsibilitieS






6️⃣ Key Features of Islamic Private Equity


  • Ethical investment screening
  • Risk-sharing instead of guaranteed returns
  • No interest-based financing
  • Shari’ah-compliant structuring of acquisitions
  • Aligns investors and managers through profit-sharing


✅ Conclusion (In Simple Terms)

Islamic private equity:


  • Is a modern, globally accepted investment method.
  • Fully compatible with Shari’ah principles.
  • Based on partnership and risk-sharing.
  • Structured mainly through:
    • Musharaka
    • Mudarabah
    • Wakalah

  • Provides competitive returns while maintaining ethical and Islamic standards.




Picture

Author

Facts about finance