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​Islamic Derivatives – Warrants


A. Definition
  • Warrants = derivative securities
    • Their value is derived from an underlying asset (usually shares)
  • Give holder:
    • Right (not obligation) to buy shares
    • At a fixed price
    • Within a specified time period


B. Similarity to Call Options
  • Warrants function like:
    • Call options (right to buy)
  • Holder expects:
    • Increase in stock price
  • Profit arises when:
    • Market price exceeds exercise price


C. Key Features
  • Right to buy:
    • Specific number of shares
  • Includes:
    • Exercise (strike) price
    • Expiry date
  • No obligation:
    • Holder can choose not to exercise


D. Major Difference from Call Options
  • Warrants:
    • Issued by:
      • The company itself
  • Call options:
    • Issued by:
      • Independent investors or traders


E. Warrant Agreement
  • Legal document that:
    • Specifies all terms and conditions
  • Includes:
    • When the warrant can be exercised
    • How it can be exercised
    • Number of shares and price


F. Company Involvement
  • When exercised:
    • Investor buys shares directly from the company
  • Result:
    • Company receives funds
    • New shares are issued


G. Key Insight
  • Warrants are:
    • Company-created rights to buy shares in future
  • Used to:
    • Attract investors
    • Enhance financing instruments


H. Shari’ah Perspective
  • May be viewed more favorably than options because:
    • Linked to real shares and ownership
  • However, concerns may still arise due to:
    • Gharar
    • Maisir


Final Takeaway
  • Warrant = company-issued call-like derivative
  • Provides:
    • Right to buy shares at fixed price
  • Key difference:
    • Directly issued by company, not market participants

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