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KembaraXtra – Islamic Derivatives: Why Options Are Called Financial Contracts
🔹 What is a Financial Contract?
👉 A financial contract is an agreement between parties that deals with:
🔹 Why Option is Called a Financial Contract
✔ 1. It Creates Legal Rights and Obligations
👉 This makes it a binding agreement
✔ 2. It Involves Money (Premium)
👉 Real financial transaction happens
✔ 3. Value Depends on Financial Variables
👉 Option value changes with market prices
✔ 4. It Deals With Future Transactions
👉 This is typical of financial contracts
✔ 5. Often No Physical Asset Exchange
👉 Focus is on financial value, not physical goods
🔹 Simple Case Example
👉 The whole contract revolves around financial gain/loss
🔹 Key Insight
👉 It is called a financial contract because:
🔹 Simple Summary
👉 That’s why it is called a financial contract
🔹 What is a Financial Contract?
👉 A financial contract is an agreement between parties that deals with:
- Money, or
- Financial assets, or
- Future financial obligations
🔹 Why Option is Called a Financial Contract
✔ 1. It Creates Legal Rights and Obligations
- Buyer gets a right (to buy or sell)
- Seller has an obligation
👉 This makes it a binding agreement
✔ 2. It Involves Money (Premium)
- Buyer pays a premium
- Seller receives it
👉 Real financial transaction happens
✔ 3. Value Depends on Financial Variables
- Price of asset (stock, commodity, currency)
- Market conditions
👉 Option value changes with market prices
✔ 4. It Deals With Future Transactions
- Agreement today
- Action happens in the future
👉 This is typical of financial contracts
✔ 5. Often No Physical Asset Exchange
- Many options are cash-settled
- Only money difference is exchanged
👉 Focus is on financial value, not physical goods
🔹 Simple Case Example
- You pay RM50 for an option
- If price changes:
- You gain or lose money
👉 The whole contract revolves around financial gain/loss
🔹 Key Insight
👉 It is called a financial contract because:
- It mainly deals with money and risk, not actual goods
🔹 Simple Summary
- Option = agreement involving:
- Money (premium)
- Rights & obligations
- Future financial outcomes
👉 That’s why it is called a financial contract
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