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KembaraXtra – Islamic Derivatives: Combined Options (Put + Call) for Hedging Risk (Simplified Explanation)
🔹 What is a Combined Option?
A combined option means using:
👉 Purpose:
🔹 Key Idea
👉 Instead of trying to predict price direction:
✔ So you are protected in both directions
🔹 Case Example (Currency – USD 💵)
📌 Situation
🔸 Strategy: Buy Both Options
👉 This is called a combined option (or straddle)
🔹 Scenario Analysis
📅 Scenario 1: USD Value Increases 📈
👉 Net effect:
📅 Scenario 2: USD Value Decreases 📉
👉 Net effect:
🔹 Important Concept (Premium Offset)
👉 You pay two premiums:
But:
✔ This reduces overall risk
🔹 Why Businesses Use This
🔹 Limitation
🔹 Shariah Perspective (Important)
Even though used for hedging:
👉 So generally not permissible
🔹 Simple Summary
🔹 What is a Combined Option?
A combined option means using:
- Call option + Put option together
👉 Purpose:
- To reduce risk (hedging)
- Commonly used for:
- Currency fluctuations 💱
- Commodity price changes 🌴
🔹 Key Idea
👉 Instead of trying to predict price direction:
- One option profits if price goes up 📈
- The other profits if price goes down 📉
✔ So you are protected in both directions
🔹 Case Example (Currency – USD 💵)
📌 Situation
- Company C is worried about USD price changes
- They enter a contract in USD
- They want to protect against fluctuation
🔸 Strategy: Buy Both Options
- Buy call option (protect against price increase)
- Buy put option (protect against price decrease)
👉 This is called a combined option (or straddle)
🔹 Scenario Analysis
📅 Scenario 1: USD Value Increases 📈
- Call option → profit ✅
- Put option → loss ❌
👉 Net effect:
- Call option profit helps cover loss from put option
📅 Scenario 2: USD Value Decreases 📉
- Put option → profit ✅
- Call option → loss ❌
👉 Net effect:
- Put option profit helps cover loss from call option
🔹 Important Concept (Premium Offset)
👉 You pay two premiums:
- One for call
- One for put
But:
- Profit from one side can offset the other
✔ This reduces overall risk
🔹 Why Businesses Use This
- To stabilize costs and revenues
- To avoid uncertainty
- To protect against both directions of price movement
🔹 Limitation
- You still pay premium cost
- Profit is reduced because:
- One side always loses
🔹 Shariah Perspective (Important)
Even though used for hedging:
- ❌ Still involves options (premium + uncertainty)
- ❌ Contains elements of:
- Gharar (uncertainty)
- Maisir (speculation)
👉 So generally not permissible
🔹 Simple Summary
- Combined option = call + put together
- Protects against price going up or down
- Used for risk management (hedging)
- Profit on one side offsets loss on the other
- ❌ Still problematic in Islamic finance
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