FINANCE

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Short Answer
✔️ Yes — a warrant is generally considered a type of embedded option
…but with a small nuance.


Islamic Derivatives – Warrant as Embedded Option (Notes)


A. Why Warrant is Considered an Embedded Option
  • A warrant gives:
    • Right (not obligation) to buy shares
  • This “right” is:
    • Built into another financial instrument (often bonds or company issuance)
  • Therefore:
    • It behaves like an option inside a larger product
👉 Hence:
  • Warrant = embedded call option–like feature


B. Why It Is NOT Exactly Like Typical Embedded Options
  • Typical embedded option:
    • Hidden inside contracts like:
      • Lease (Ijarah)
      • Financing agreements
  • Warrant:
    • Sometimes can be:
      • Detached and traded separately
👉 So:
  • It is:
    • ✔️ Embedded at issuance
    • ❗ But can behave like a stand-alone instrument later


C. Key Characteristics of Warrants
  • ✔️ Right to buy shares only (like call option)
  • ✔️ Issued by company
  • ✔️ May be:
    • Attached to bonds (embedded), or
    • Traded separately (quasi stand-alone)


D. Shari’ah Perspective Insight
  • Considered closer to embedded options because:
    • Linked to real shares
  • But concerns remain:
    • Gharar
    • Maisir
  • Especially when:
    • Actively traded for speculation


Final Takeaway
  • ✔️ Warrant = embedded option at origin
  • ❗ Can become stand-alone-like when traded separately
  • 👉 Best description:
    • “Hybrid between embedded and stand-

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Islamic Derivatives – Minority View, Warrants & Shari’ah Issues

A. Minority View on Options
  • Some scholars (minority opinion):
    • Support approval of options
  • Reason:
    • Useful for:
      • Risk management (hedging)
      • Protecting against market uncertainty
  • Islamic Financial Institutions (IFIs):
    • Through Shari’ah boards, adopt this view
    • Develop Shari’ah-compliant alternatives to conventional options


B. Warrants (Concept & Features)
Definition
  • Warrant = corporate security similar to a call option
  • Gives holder:
    • Right (not obligation) to buy shares
    • At a fixed price
    • Within a specific time period


Key Features
  • Specifies:
    • Number of shares
    • Exercise price
    • Expiry date
  • Often:
    • Attached to bonds when issued
  • Buyer:
    • Has choice to exercise or not


Investor Perspective
  • Similar to:
    • Call option on shares
  • Benefit:
    • Buy shares at pre-agreed price


Company Perspective
  • Key difference from call options:
    • Warrant issued by company
    • Call option issued by investors/traders


When Exercised
  • Call option:
    • Shares bought from other investors
    • Company not involved
  • Warrant:
    • Shares bought directly from company
    • Company:
      • Receives money
      • Issues new shares (increase in shares outstanding)


C. Shari’ah Concern on Warrants (Embedded Options)
Main Issue: Uncertainty (Gharar)
  • Concern:
    • Gharar
  • Reason:
    • Future price of shares is unknown
    • Decision to:
      • Exercise or cancel is uncertain


Speculation Issue
  • Some investors may:
    • Use warrants for speculation only
  • Leads to:
    • Maisir


Scholarly View (Jobst, 2007)
  • Options may involve:
    • Gharar fahish (excessive uncertainty)
  • Due to:
    • Lack of clarity about future outcomes


D. Legal Maxim (Qawa’id Fiqhiyyah)
  • Dar’ al-mafasid muqaddam min jalb al-masalih
  • Meaning:
    • Avoiding harm is prioritized over gaining benefit
  • Used to argue:
    • Options may be prohibited due to risk and speculation


E. Alternative View (Permissibility with Conditions)
  • Some jurists allow embedded options (like warrants) because:
    • Obligations are:
      • Between two parties only
      • Not transferable to third parties
  • This reduces:
    • Speculative trading


Important Consequence
  • Restricting transferability:
    • May limit or eliminate organized options markets


F. Role of Options in Modern Economy
  • Seen as:
    • Hedging instruments (risk reduction tools)
  • Important for:
    • Managing economic fluctuations
  • Serve:
    • Public interest (maslahah)
    • Welfare of the ummah (community)


G. Balanced View
  • Issues like:
    • Gharar
    • Maisir
    • Often arise due to:
      • Speculative misuse by some investors
  • Argument:
    • Cannot generalize prohibition for all options


H. Final Insight
  • No exact equivalent in classical Fiqh al-Muamalat
    for modern derivatives like:
    • Futures
    • Options
    • Warrants


Conclusion
  • Must evaluate:
    • Both benefits and risks
  • Use:
    • Islamic principles to assess permissibility
  • Outcome:
    • Ongoing debate between:
      • Prohibition (majority)
      • Conditional permissibility (minority)

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Islamic  Derivatives – Why Warrants Are Linked to Real Assets but Options Are Not 


A. Warrants → Direct Link to Real Asset
  • Warrant gives:
    • Right to buy actual company shares
  • When exercised:
    • ✔️ You receive real shares
    • ✔️ Company issues new shares
  • So:
    • There is a clear underlying asset (equity/shares)
    • Leads to real ownership
👉 Key idea:
  • Warrant → ends in actual asset transfer


B. Options → Often Not Linked in Practice
  • Option gives:
    • Right to buy or sell
  • BUT in reality:
    • Most options are:
      • Traded repeatedly
      • Closed before expiry
      • Settled in cash (no delivery)
👉 So:
  • ❌ No actual asset exchanged
  • ❌ No real ownership happens


C. Nature of Trading
Warrants
  • Usually:
    • Held until exercised
  • Purpose:
    • Investment in company shares


Options
  • Commonly used for:
    • Speculation
    • Price betting
  • Traders:
    • Rarely intend to own the asset


D. Shari’ah Concern
  • Options involve:
    • Gharar
    • Maisir
  • Because:
    • Focus is on price movement, not ownership


E. Key Conceptual Difference
  • Warrant:
    • Right tied to real shares issued by company
    • Leads to actual ownership
  • Option:
    • Right often treated as a tradable financial claim
    • May never lead to real asset transfer


F. Important Clarification
  • It’s not that options cannot involve real assets
  • The issue is:
    • How they are used in practice
    • Heavy speculation + no delivery


Final Takeaway
  • ✔️ Warrants = closer to real asset-based transaction
  • ❗ Options = often detached from real assets in practice
  • 👉 That’s why warrants are sometimes viewed as more acceptable (relatively) in Islamic finance


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Islamic Derivatives – Minority View & Warrants 


A. Minority View on Options
  • Some scholars (minority opinion):
    • Believe options can be approved
  • Reason:
    • Useful for:
      • Risk management (hedging)
      • Business needs


B. Role of Shari’ah Boards
  • Shari’ah boards in Islamic Financial Institutions (IFIs):
    • Adopt minority opinions
  • Aim:
    • Develop Shari’ah-compliant alternatives to conventional options
  • Approach:
    • Modify structure to:
      • Avoid Maisir
      • Avoid Gharar
      • Link to real assets and transactions


C. Warrants (Basic Concept)
Definition
  • Warrant = corporate security similar to a call option
  • Gives holder:
    • Right (not obligation) to buy company shares
    • At a fixed price
    • Within a specific time period


Key Features of Warrants
  • Specify:
    • Number of shares
    • Exercise price
    • Expiry date
  • Often:
    • Attached to bonds when issued
  • Buyer:
    • Can choose whether to exercise or not


Investor Perspective
  • Warrants are similar to:
    • Call options on shares
  • Benefit:
    • Buy shares at fixed (possibly lower) price


D. Difference Between Warrants and Call Options
1. Issuance
  • Call option:
    • Issued by individual investors/traders
  • Warrant:
    • Issued by the company itself


2. When Exercised
  • Call option:
    • Buyer purchases shares from another investor
    • Company is not directly involved
  • Warrant:
    • Buyer purchases shares directly from company
    • Company:
      • Receives money
      • Issues new shares


3. Effect on Company
  • Call option:
    • No change in company shares
  • Warrant:
    • Increases number of shares outstanding


E. Shari’ah Insight
  • Warrants may be viewed more favorably than options if:
    • Linked to real shares (underlying asset)
    • Not purely speculative
  • Still debated depending on:
    • Structure and usage


F. Final Takeaway
  • Minority scholars support developing Islamic alternatives
  • Warrants:
    • Function like call options
    • But differ in:
      • Issuer (company vs investor)
      • Impact on shares
  • Seen as a possible bridge toward Shari’ah-compliant option-like instruments

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Islamic Derivatives – How Warrants Work 


A. Basic Idea of a Warrant
  • Warrant = right (not obligation) to buy shares
  • Very similar to a call option only
  • Issued by the company, not traders


B. Does a Warrant Have Call or Put?
  • ✔️ Warrant = like a CALL option
    • Right to buy shares at fixed price
  • ❌ No “put warrant” in the usual sense
    • It does not give right to sell


C. Is There a Premium?
  • ✔️ Yes, but different from options:
    • You pay to get the warrant
    • Cost may be:
      • Paid directly, or
      • Included in another product (e.g. bond)
👉 So:
  • It behaves like a premium, but:
    • Not always shown separately
    • Sometimes embedded in price


D. How It Works (Step-by-Step)
  1. You receive or buy a warrant
    • Example: Right to buy shares at RM10
  2. Wait until future date
  3. Two outcomes:
  • If market price = RM15:
    • ✔️ Exercise warrant
    • Buy at RM10 → profit
  • If market price = RM8:
    • ❌ Do not exercise
    • Let it expire → loss limited to cost of warrant


E. Key Difference from Call Option
  • Call option:
    • Buy shares from another investor
  • Warrant:
    • Buy shares directly from the company
    • Company issues new shares


F. Simple Comparison
  • Warrant:
    • ✔️ Right to buy
    • ✔️ Issued by company
    • ✔️ May have implicit premium
    • ❌ No selling right


G. Shari’ah Insight
  • More acceptable (in some views) because:
    • Linked to real shares
  • But still debated due to:
    • Gharar
    • Maisir


H. Final Takeaway
  • Warrant = company-issued call option (only buy right)
  • Has cost like premium, but may be embedded
  • Used to buy shares in future at fixed price

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KembaraXtra – Islamic Derivatives: Are All Markets Spot Markets? (Clarification)


🔹 Short Answer
 
👉 ❌ Not exactly
 
✔ These markets can operate in both spot and non-spot (derivatives) forms


🔹 1. Commodity Market 🌴
 
👉 Can be:
  • ✔ Spot market → buy palm oil and receive immediately
  • ✔ Derivatives market → futures/options (no immediate delivery)
 
✔ So:
👉 Commodity market = spot + derivatives


🔹 2. Stock Market 📊
 
👉 Mostly operates as:
  • ✔ Spot market (buy shares, ownership transferred quickly)
 
BUT also has:
  • ✔ Stock options
  • ✔ Stock futures
 
👉 So:
✔ Stock market = mainly spot, but also derivatives exist


🔹 3. Debt Market (Bond/Sukuk) 📄
 
👉 Usually:
  • ✔ Spot-based transactions (buy and hold instruments)
 
BUT:
  • Can also have derivatives based on bonds
 
👉 So:
✔ Debt market = mainly spot, but derivatives may exist


🔹 4. Derivatives Market 📉
 
👉 This is different:
  • ❌ Not a spot market
  • ✔ Based on future contracts
  • ✔ Often no real delivery


🔹 5. Correct Understanding (Very Important)
 
👉 Markets are classified by what is traded, not by spot/derivative only
  • Commodity market → goods
  • Stock market → shares
  • Debt market → bonds/sukuk
 
👉 Each of these can have:
  • Spot transactions
  • Derivative transactions


🔹 Simple Table
  • Commodity market → spot ✔ / derivatives ✔
  • Stock market → spot ✔ / derivatives ✔
  • Debt market → spot ✔ / derivatives ✔
  • Derivatives market → ❌ not spot


🔹 Key Insight
 
👉 “Spot vs derivatives” is not a type of market
👉 It is a type of transaction within markets


🔹 Simple Summary
  • Your idea is partly correct ✅
  • But more accurate is:
 
👉 Most markets include:
  • Spot trading
  • Derivative trading
 
👉 Only derivatives market is purely non-spot


🔹 Final Exam Insight
 
👉 “Commodity, stock, and debt markets can operate in both spot and derivative forms, whereas the derivatives market exclusively involves non-spot transactions based on future obligations.”
 

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KembaraXtra – Islamic Derivatives: Why Derivatives Market is Considered Financial, Not Commodity


🔹 Key Idea
 
👉 Even though derivatives are based on commodities,
👉 they are considered financial markets because:
 
✔ What is traded = contracts, not actual goods


🔹 1. What is Actually Traded?
 
🔸 Commodity Market
  • Trades real goods
    • Palm oil
    • Gold
    • Oil
 
✔ You get the physical asset


🔸 Derivatives Market
  • Trades contracts (agreements)
 
Examples:
  • Futures
  • Options
  • Warrants
 
❗ You are NOT trading the commodity itself


🔹 2. No Physical Delivery (Most Cases)
 
👉 In derivatives:
  • Usually no real goods are exchanged
  • Only:
    • Price difference
    • Cash settlement
 
✔ So it becomes:
👉 purely financial transaction


🔹 3. Value is Based on Price Movement
 
👉 Profit comes from:
  • Change in price
  • Not from using or owning the asset


🔸 Example
  • Palm oil futures:
    • You don’t receive palm oil
    • You receive RM difference
 
✔ This is financial gain


🔹 4. Purpose is Financial (Not Consumption)
 
👉 Commodity market:
  • Used for:
    • Production
    • Consumption


👉 Derivatives market:
  • Used for:
    • Hedging
    • Speculation
 
✔ Focus = financial risk management


🔹 5. Standardized and Tradable Contracts
 
👉 Derivatives are:
  • Standardized
  • Traded like financial instruments
 
✔ Similar to:
  • Stocks
  • Bonds


🔹 6. Key Insight
 
👉 Even if based on commodities:
  • The underlying asset is secondary
  • The contract itself is primary
 
✔ That’s why it is:
👉 A financial market


🔹 7. Simple Comparison
  • Commodity market:
    • Real goods
    • Physical delivery
  • Derivatives market:
    • Contracts
    • Cash settlement


🔹 Islamic Finance Insight
 
👉 This is why derivatives are problematic:
  • ❌ No real asset exchange
  • ❌ Profit from price movement only
  • ❌ Leads to speculation


🔹 Simple Summary
  • Derivatives market is financial because:
    • ✔ Trades contracts, not goods
    • ✔ Uses cash settlement
    • ✔ Focuses on price movements


🔹 Final Exam Insight
 
👉 “The derivatives market is considered financial rather than a commodity market because it involves trading of financial contracts based on underlying assets, with profits derived from price movements rather than actual exchange of goods.”
 

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KembaraXtra – Islamic Derivatives: Role of Derivatives (Options, Warrants & Futures) in Conventional vs Islamic Finance


🔹 Key Idea
 
👉 In modern finance:
  • Derivatives (options, warrants, futures) are widely used
  • They help investors:
    • Increase returns
    • Manage risk
 
👉 Islamic finance is also growing and trying to:
  • Develop Shariah-compliant alternatives


🔹 1. Why Derivatives Are Important in Conventional Markets
 
✔ 1. Higher Return Opportunities
  • Investors use derivatives to:
    • Gain profit from price movements
    • Use leverage
 
👉 Attracts sophisticated investors


✔ 2. Risk Management (Hedging)
  • Protect against:
    • Price changes
    • Currency fluctuations
 
✔ Important for businesses


✔ 3. Market Innovation
  • Financial markets continuously develop:
    • New structured products
    • Complex instruments
 
👉 Driven by:
  • Investor demand
  • Competition


🔹 2. Why Islamic Finance Is Adopting Them
 
👉 Islamic finance is growing rapidly
  • Investors want:
    • Halal investments
    • Risk management tools
 
👉 So:
✔ Shariah-compliant versions are being developed


🔹 3. Challenge: Converting to Shariah-Compliant
 
👉 Main issue:
  • Conventional derivatives contain:
    • ❌ Gharar (uncertainty)
    • ❌ Maisir (speculation)
    • ❌ No real asset exchange


👉 Therefore, Islamic finance must:
 
✔ Modify structure
✔ Link to real assets
✔ Avoid speculation


🔹 4. Why Understanding Conventional Derivatives is Important
 
👉 Before making Islamic versions:
  • Must understand:
    • How options work
    • How futures work
    • How warrants work
 
✔ Only then can scholars:
  • Identify problems
  • Propose solutions


🔹 5. Key Insight
 
👉 Islamic finance does NOT reject innovation
 
✔ It accepts:
  • Financial development
 
❗ But requires:
  • Compliance with Shariah principles


🔹 Simple Summary
  • Derivatives are important in modern finance
  • Islamic finance is adapting them carefully
  • Must remove:
    • Speculation
    • Uncertainty
  • Must ensure:
    • Real economic activity


🔹 Final Exam Insight
 
👉 “While derivatives play a crucial role in conventional financial markets for risk management and return enhancement, Islamic finance seeks to adapt these instruments into Shariah-compliant forms by eliminating elements of speculation and uncertainty.”
 

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KembaraXtra – Islamic Derivatives: How Leverage Works in Options and Futures


🔹 What is Leverage?
 
👉 Leverage means:
  • Using small capital
  • To control a large value of assets
 
✔ It magnifies profit and loss


🔹 1. Leverage in Futures Contracts
 
🔸 How It Works
  • You don’t pay full contract value
  • You only deposit margin


🔸 Example
  • Contract value = RM10,000
  • Margin required = RM1,000
 
👉 You control RM10,000 with RM1,000
 
✔ Leverage = 10x


📅 Scenario
  • Price increases by 10% → gain = RM1,000
 
👉 Your return:
  • RM1,000 profit on RM1,000 investment = 100% gain ✅


👉 If price drops by 10%:
  • Loss = RM1,000
 
❌ You lose all your margin


🔹 2. Leverage in Options
 
🔸 How It Works
  • You pay premium (small amount)
  • Control larger value of asset


🔸 Example (Call Option)
  • Premium = RM50
  • Controls shares worth RM4,000
 
👉 Very high leverage


📅 Scenario
  • Price increases → profit = RM500
 
👉 Your return:
  • RM500 on RM50 = 1000% gain ✅


👉 If price falls:
  • Loss = RM50 only ❌
 
✔ Limited loss, high leverage


🔹 3. Key Difference
  • Futures leverage:
    • High profit
    • High loss (unlimited risk)


  • Options leverage:
    • Buyer → limited loss
    • Seller → high risk


🔹 4. Why Investors Use Leverage
  • Increase potential returns
  • Use less capital
  • Access bigger positions


🔹 5. Risk of Leverage ⚠️
 
👉 Leverage can:
  • Multiply gains ✅
  • Multiply losses ❌
 
👉 Very risky if market moves against you


🔹 6. Shariah Perspective
  • ❌ Often linked to:
    • Speculation
    • Excessive risk
 
👉 Needs careful structuring in Islamic finance


🔹 Simple Summary
  • Leverage = small money → large exposure
  • Futures → margin-based leverage
  • Options → premium-based leverage
  • High reward but high risk


🔹 Final Exam Insight
 
👉 “Leverage in futures and options allows investors to control large positions with small capital, amplifying both potential profits and losses.”
 

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KembaraXtra – Islamic Derivatives: Option Contracts (Clear Explanation & Key Concepts)


🔹 What is an Option?
 
👉 An option is a contract that gives the holder:
  • The right (not obligation)
  • To buy or sell a specific asset
  • At a fixed price (strike price)
  • Within a specific time period (until expiry date)


🔹 Key Terms
 
✔ Strike Price (Exercise Price)
  • The fixed price agreed in the contract


✔ Expiration Date
  • The last date the option can be used
  • Example: often third Friday of the month


✔ Premium
  • Amount paid by buyer to seller
  • Cost of getting the option right


✔ Contract Size
  • 1 option contract = 100 shares


✔ Underlying Asset
  • The asset the option is based on
  • Example: stock shares


🔹 Important Note
 
👉 The company does NOT issue options
  • Options are created and traded between:
    • Investors
    • Traders
 
✔ Unlike warrants (issued by company)


🔹 4 Basic Option Strategies


🔸 1. Buying Call (Long Call)
  • Right to buy
  • Expect price to increase 📈
 
✔ Profit when price rises


🔸 2. Buying Put (Long Put)
  • Right to sell
  • Expect price to decrease 📉
 
✔ Profit when price falls


🔸 3. Selling Call (Short Call)
  • Obligation to sell
  • Expect price to stay or fall
 
✔ Profit = premium
❗ Risk = high if price rises


🔸 4. Selling Put (Short Put)
  • Obligation to buy
  • Expect price to stay or rise
 
✔ Profit = premium
❗ Risk = high if price falls


🔹 Simple Summary
  • Option = right to buy/sell at fixed price
  • Buyer pays premium
  • Seller has obligation
  • 4 strategies:
    • Long call
    • Long put
    • Short call
    • Short put


🔹 Final Exam Insight
 
👉 “Options are contracts granting the right, but not obligation, to buy or sell an underlying asset at a predetermined price within a specified time, with four main strategies involving buying and selling calls and puts.”
 

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