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KembaraXtra – Islamic Derivatives: How Futures Contracts Work (Conventional vs Islamic)
🔹 1. How Conventional Futures Contracts Work
A futures contract is an agreement to buy or sell an asset at a fixed price on a future date.
🔸 Step-by-Step Process
🔸 Case Scenario (Palm Oil 🌴)
👉 After 1 month:
If price = RM4,500
If price = RM3,500
👉 Usually, no real delivery — just profit/loss paid
🔹 Key Features (Conventional)
🔹 2. How Islamic “Futures-like” Contracts Work
👉 True conventional futures are not allowed in Islam
But Islam provides alternatives that achieve similar goals.
🔸 (A) Salam Contract (Main Alternative)
How it works:
🔸 Case Scenario (Palm Oil 🌴)
👉 After 1 month:
If market price = RM4,500
If market price = RM3,500
🔸 (B) Istisna’ (For Manufacturing)
🔹 Key Differences (Simple)
🔹 Simple Summary
🔹 1. How Conventional Futures Contracts Work
A futures contract is an agreement to buy or sell an asset at a fixed price on a future date.
🔸 Step-by-Step Process
- Agreement Today
- Buyer and seller agree on:
- Price
- Quantity
- Future delivery date
- Buyer and seller agree on:
- Margin Deposit
- Both parties deposit margin with a clearing house
- Daily Price Adjustment
- Profits/losses updated daily (mark-to-market)
- Settlement
- At expiry:
- Either physical delivery, or
- Cash settlement (most common)
- At expiry:
🔸 Case Scenario (Palm Oil 🌴)
- You agree to buy 1 ton of palm oil at RM4,000 in 1 month
👉 After 1 month:
If price = RM4,500
- You gain RM500 ✅
If price = RM3,500
- You lose RM500 ❌
👉 Usually, no real delivery — just profit/loss paid
🔹 Key Features (Conventional)
- Both payment and delivery deferred
- Heavy speculation
- Often no ownership or delivery
- Involves margin system
🔹 2. How Islamic “Futures-like” Contracts Work
👉 True conventional futures are not allowed in Islam
But Islam provides alternatives that achieve similar goals.
🔸 (A) Salam Contract (Main Alternative)
How it works:
- Buyer pays full price upfront
- Seller delivers goods later
🔸 Case Scenario (Palm Oil 🌴)
- You pay RM4,000 now
- Seller agrees to deliver 1 ton palm oil in 1 month
👉 After 1 month:
If market price = RM4,500
- You benefit (bought cheaper) ✅
If market price = RM3,500
- You still must accept goods ❌
🔸 (B) Istisna’ (For Manufacturing)
- Used for custom goods (e.g., buildings, machinery)
- Payment can be flexible (not fully upfront)
- Delivery happens in the future
🔹 Key Differences (Simple)
- Conventional futures
- ❌ Both payment & delivery delayed
- ❌ Speculation
- ❌ No real ownership
- Islamic (Salam)
- ✅ Payment upfront
- ✅ Real goods involved
- ✅ Less uncertainty
🔹 Simple Summary
- Conventional futures = agreement now, settle later (both sides delayed) → ❌ not Shariah-compliant
- Islamic alternative (Salam) = pay now, receive later → ✅ allowed
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