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Islamic Derivatives – Example: How Delivery is Avoided in Futures
A. Basic Idea
B. Step-by-Step Example (Wheat Futures)
Step 1: Enter the Contract
Step 2: Price Changes Before Expiry
Step 3: Close the Contract (Avoid Delivery)
Step 4: Result
C. Reverse Example (Loss Case)
D. Key Concept
E. Why This Happens
F. Simple Formula
G. Shari’ah Insight
Final Takeaway
A. Basic Idea
- You don’t have to hold the futures contract until delivery
- You can cancel it by taking the opposite position
B. Step-by-Step Example (Wheat Futures)
Step 1: Enter the Contract
- Ahmad buys a wheat futures contract:
- Price = $100 per ton
- Delivery = 3 months later
- This means:
- He is obligated to receive wheat at $100
Step 2: Price Changes Before Expiry
- After 2 months:
- Market price rises to $120 per ton
Step 3: Close the Contract (Avoid Delivery)
- Ahmad now:
- Sells the same futures contract at $120
Step 4: Result
- Profit = $120 − $100 = $20 per ton
- Contract is:
- ✔️ Offset (cancelled out)
- Outcome:
- ❌ No wheat is delivered
- ✔️ Only cash profit is settled
C. Reverse Example (Loss Case)
- If price falls to $80:
- Ahmad sells at $80
- Loss = $100 − $80 = $20 per ton
- Still:
- ❌ No delivery happens
- ✔️ Only loss is settled in cash
D. Key Concept
- Buying + Selling same contract before expiry =
👉 No delivery
E. Why This Happens
- Traders usually:
- Want profit from price movement
- Not actual commodities (like wheat, oil, etc.)
F. Simple Formula
- Buy contract → later sell it
- Sell contract → later buy it back
👉 = Position closed
G. Shari’ah Insight
- This practice leads to:
- ❌ No real exchange
- ❌ No ownership transfer
- Raises concerns:
- Gharar
- Maisir
Final Takeaway
- Delivery is avoided by:
- Taking an opposite position before expiry
- Result:
- Only profit/loss is settled
- No physical goods
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