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Islamic Derivatives – Warrants vs Call Options
A. Basic Similarity
B. Warrants
Definition
Key Features
C. Call Options
Definition
Key Features
D. Key Differences (in points)
E. Shari’ah Perspective
F. Final Takeaway
A. Basic Similarity
- Both give:
- Right (not obligation) to buy an asset
- At a fixed price
- Within a specific time period
- Both behave like:
- Call-type instruments
B. Warrants
Definition
- Warrant = company-issued right to buy shares
Key Features
- Issued by:
- The company itself
- Underlying asset:
- Company’s own shares
- When exercised:
- ✔️ Investor buys shares from the company
- ✔️ Company issues new shares
- Effect:
- Increases number of shares outstanding
- Often:
- Attached to bonds or securities
C. Call Options
Definition
- Call option = market-traded right to buy an asset
Key Features
- Issued by:
- Investors/traders (not the company)
- Underlying asset:
- Shares, commodities, indices, etc.
- When exercised:
- ✔️ Buyer purchases from another investor
- ❌ Company is not involved
- Effect:
- No change in company shares
- Commonly:
- Traded actively in markets
D. Key Differences (in points)
- Warrants are issued by companies; call options are created by market participants
- Warrants involve new shares being issued; call options involve existing shares only
- Warrants are often long-term; call options are usually short-term
- Warrants are often attached to financial products; call options are stand-alone contracts
- Warrants are more linked to real investment; call options are often used for speculation
E. Shari’ah Perspective
- Warrants:
- Sometimes viewed more favorably because:
- Linked to real shares and ownership
- Sometimes viewed more favorably because:
- Call options:
- More concerns due to:
- Gharar
- Maisir
- Speculative trading
- More concerns due to:
F. Final Takeaway
- ✔️ Both give right to buy
- ❗ Main difference:
- Warrant = company-issued, leads to new shares
- Call option = market-traded, no company involvement
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