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Islamic Derivatives – Combined Options
Use of Combined Options
What is a Combined Option?
Corrected Example (C and USD Fluctuation)
Outcomes
1. If USD value increases
2. If USD value decreases
Key Idea
Important Insight
Shari’ah Note
Final Takeaway
Use of Combined Options
- Businesses use:
- Call + Put options together
- Purpose:
- Hedge risk from:
- Currency fluctuations (e.g. USD)
- Commodity price changes
- Hedge risk from:
What is a Combined Option?
- Combination of:
- Call option → right to buy
- Put option → right to sell
- Designed so that:
- One option offsets the loss of the other
Corrected Example (C and USD Fluctuation)
- C is worried that USD value may change and affect a contract
- To reduce risk, C buys a combined option (call + put)
Outcomes
1. If USD value increases
- ✅ Call option is exercised
- C can buy at lower fixed price
- → Gains profit / saves cost
- ❌ Put option is not used
- ✔️ Profit from call helps offset premium cost
2. If USD value decreases
- ✅ Put option is exercised
- C can sell at higher fixed price
- → Gains profit
- ❌ Call option is not used
- ✔️ Profit from put helps offset premium cost
Key Idea
- Combined options provide:
- Protection in both directions (price up or down)
- A form of risk management (hedging)
Important Insight
- Only one option is useful at a time:
- Call → when prices rise
- Put → when prices fall
Shari’ah Note
- Despite hedging benefits, concerns remain:
- Gharar
- Maisir
- Therefore, permissibility is debated among scholars
Final Takeaway
- ✔️ The corrected logic:
- Call = benefit when price rises
- Put = benefit when price falls
- ✔️ Combined options = balanced risk protection, not contradiction
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