FINANCE

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KembaraXtra – Islamic Derivatives: How Short Selling Works in Futures Contracts


🔹 What is Short Selling in Futures?
 
In futures contracts, short selling means you agree to sell a commodity at a fixed price today, even though you do not own it yet, expecting the price to fall in the future.


🔹 How It Works (Step-by-Step)
 
1. Enter a Futures Contract (Sell Position)
  • You take a short position (you agree to sell).
  • Example: You agree to sell oil at $100 in the future.


2. Price Changes in the Market
  • You hope the market price will drop.


3. If Price Falls (Profit Scenario)
  • Market price becomes $80
  • You effectively gain the difference:
 
👉 Profit = $100 − $80 = $20


4. If Price Rises (Loss Scenario)
  • Market price becomes $120
  • You lose the difference:
 
👉 Loss = $120 − $100 = $20


5. Settlement (Usually No Physical Delivery)
  • Most futures contracts are settled by cash difference, not actual goods.
  • So you don’t actually deliver the commodity — you just pay or receive profit/loss.


🔹 Key Idea
  • “Short selling” in futures does not require owning the asset
  • You are trading based on price movements, not physical ownership


🔹 Why This Is an Issue in Islamic Finance
  • ❌ Selling without ownership
  • ❌ No real delivery in many cases
  • ❌ High speculation (maisir & gharar)
 
👉 This is why many scholars consider it non-compliant with Shariah


🔹 Simple Summary
  • Short selling in futures = agreeing to sell first, buy later
  • Profit if price falls 📉
  • Loss if price rises 📈
  • Often involves no real ownership, which is problematic in Islam
 

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KembaraXtra – Islamic Derivatives: Short Selling (Futures) vs Salam Contract


🔹 Short Selling in Futures Contracts (Notes)
  • Sell an asset without owning it
  • Enter a short position (agree to sell first)
  • Buy later at market price
  • Profit if price falls 📉
  • Loss if price rises 📈
  • Usually no physical delivery
  • Based on price speculation
  • ❌ Not Shariah-compliant


🔹 Salam Contract (Islamic Alternative) (Notes)
  • Buyer pays full amount upfront
  • Seller delivers goods in the future
  • Only delivery is delayed (allowed)
  • Involves real goods and trade
  • No excessive uncertainty
  • Used in agriculture and business planning
  • ✅ Shariah-compliant


🔹 Key Differences (Note Form)
  • Ownership
    • Short selling: ❌ No ownership
    • Salam: ✅ Proper ownership/obligation
  • Payment
    • Short selling: ❌ Deferred
    • Salam: ✅ Paid upfront
  • Delivery
    • Short selling: ❌ Often no delivery
    • Salam: ✅ Actual delivery required
  • Speculation
    • Short selling: ❌ High speculation
    • Salam: ✅ Minimal speculation
  • Shariah Status
    • Short selling: ❌ Not permissible
    • Salam: ✅ Permissible


🔹 Simple Overall Summary
  • Short selling in futures involves selling without ownership and speculation, making it not allowed in Islam
  • Salam is a valid Islamic contract where payment is made first and goods are delivered later, ensuring fairness and compliance with Shariah
 

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KembaraXtra – Islamic Derivatives: Sale of Debt for Debt (Bai al-Kali bil-Kali) in Futures Contracts


🔹 What is Bai al-Kali bil-Kali?
 
Bai al-Kali bil-Kali means a sale of debt for debt, where:
  • Both payment and delivery are delayed to the future
  • No immediate exchange takes place
 
👉 This type of transaction is prohibited in Islamic law (Shariah)


🔹 How It Happens in Futures Contracts
 
In a typical futures contract:
  • The buyer does not pay immediately
  • The seller does not deliver immediately
 
👉 Both obligations are postponed → this creates a situation of:
debt (payment) vs debt (delivery)


🔹 Simple Example
  • You agree today to buy wheat at $100 in 3 months
  • You don’t pay now ❌
  • The seller doesn’t deliver now ❌
 
👉 Both sides are waiting → this becomes debt for debt


🔹 Why It Is Not Allowed in Islam
 
Islam requires that in a valid sale:
  • At least one side must be immediate (either payment or delivery)
 
❌ In Bai al-Kali bil-Kali:
  • Payment is delayed
  • Delivery is delayed
 
👉 This leads to:
  • Uncertainty (gharar)
  • Risk of default
  • Lack of real exchange


🔹 Comparison with Salam (Allowed Contract)
  • Salam:
    • ✅ Payment made now
    • ⏳ Delivery later
  • Futures (Debt for Debt):
    • ⏳ Payment later
    • ⏳ Delivery later
 
👉 That’s why Salam is allowed, but this structure is not


🔹 Simple Summary
  • Bai al-Kali bil-Kali = debt for debt
  • Happens when both payment and delivery are delayed
  • Found in many futures contracts
  • ❌ Not Shariah-compliant
 

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KembaraXtra – Islamic Derivatives: Delay in Delivery in Futures Contracts & Why It Is Considered a Debt


🔹 What is Delay in Delivery?
 
In a futures contract:
  • The seller agrees to deliver goods at a future date
  • No goods are given at the time of agreement
 
👉 This is called deferred delivery


🔹 Why Is It Considered a Debt?
 
In Islamic finance, once a contract is made:
  • The seller now has an obligation to deliver goods in the future
  • This obligation is treated as a debt (dayn)
 
👉 Because:
  • The buyer is owed the goods
  • Even though delivery is just “late”, it becomes a binding liability


🔹 Simple Explanation
 
Think of it like this:
  • If someone promises to give you something later
  • You now have a right over that item
  • They now owe you that item
 
👉 That “owing” = debt


🔹 In Futures Contracts
  • Seller owes → future delivery of goods (debt)
  • Buyer owes → future payment (debt)
 
👉 So both sides owe something →
This becomes debt vs debt (Bai al-Kali bil-Kali)


🔹 Why This Is Problematic in Islam
 
Islam allows:
  • ✅ One side delayed (like in Salam)
 
But does NOT allow:
  • ❌ Both sides delayed
 
Because it leads to:
  • Uncertainty (gharar)
  • Risk of non-fulfillment
  • No real exchange at contract time


🔹 Important Clarification
 
✔ It’s not just “being late” casually
✔ It is a formal obligation created by contract
 
👉 That’s why it is treated as a debt, not just a delay


🔹 Simple Summary
  • Delay in delivery = seller owes goods in the future
  • This obligation = debt (dayn)
  • In futures, both sides owe → debt for debt ❌
  • This is why it is not Shariah-compliant
 

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KembaraXtra – Islamic Derivatives: What is Debt (Dayn) Under Islamic Law


🔹 What is Debt (Dayn) in Islamic Law?
 
In Islamic law, debt (dayn) refers to any obligation owed by one party to another, whether in the form of:
  • Money 💰
  • Goods 📦
  • Services 🛠️
 
👉 It is something that must be fulfilled in the future.


🔹 Key Idea
 
A debt is created when:
  • One party has a right to receive something, and
  • The other party has a duty to deliver or pay it later


🔹 Types of Debt in Islamic Law
 
1. Debt of Payment (Money Debt)
  • When someone owes money
👉 Example: Buying goods now and paying later


2. Debt of Delivery (Goods Debt)
  • When someone owes goods or services
👉 Example:
  • A seller agrees to deliver wheat in 3 months
  • The buyer now has a right to receive the wheat
 
👉 This obligation is called a debt of delivery


🔹 Debt of Delivery Explained (Important)
 
Even though goods are not yet delivered:
  • The seller is legally bound to deliver them
  • The buyer is entitled to receive them
 
👉 Therefore:
  • The goods become a liability (debt) on the seller
 
✔ This is not just a delay — it is a formal obligation


🔹 How This Relates to Futures Contracts
 
In futures contracts:
  • Seller owes → future delivery of goods (debt)
  • Buyer owes → future payment (debt)
 
👉 Both sides owe something →
This becomes debt vs debt (Bai al-Kali bil-Kali) ❌


🔹 Why Islam Regulates Debt Strictly
 
Islam emphasizes:
  • Fairness and certainty
  • Clear ownership and exchange
 
So:
  • ✅ One-sided debt (like in Salam) is allowed
  • ❌ Two-sided debt (debt vs debt) is not allowed


🔹 Simple Summary
  • Debt (dayn) = obligation to pay or deliver in the future
  • Includes:
    • Money debt 💰
    • Delivery debt 📦
  • In futures:
    • Both sides create debt → ❌ not permissible
 

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KembaraXtra – Islamic Derivatives: Option Contract, Premium, Call Option & Put Option (With Scenarios)


🔹 What is an Option Contract?
 
An option contract is a financial agreement that gives the buyer the right (but not the obligation) to:
  • Buy or
  • Sell an asset
 
at a fixed price (strike price) within a certain time.
 
👉 The buyer pays a premium for this right.


🔸 Scenario (Option Contract)
  • You pay $5 (premium)
  • You get the right to buy a stock at $100 (strike price) in the future
 
👉 You can choose to:
  • Use the option if it is profitable ✅
  • Ignore it if it is not ❌


🔹 What is Strike Price?
 
The strike price is the fixed price at which you can:
  • Buy (call option), or
  • Sell (put option)
 
👉 It is agreed at the beginning of the contract


🔹 What is a Premium?
 
A premium is the fee paid to buy the option contract.
  • Paid by the buyer
  • Received by the seller
  • It is non-refundable
 
👉 It is the cost of having flexibility and choice


🔹 What is a Call Option?
 
A call option gives the right to buy an asset at the strike price.


🔸 Scenario (Call Option)
  • Strike price = $100
  • Premium = $5
 
👉 If market price rises to $120:
  • Buy at $100
  • Sell at $120
  • Profit = $20 − $5 = $15
 
👉 If market price falls to $90:
  • Do not use the option
  • Loss = $5 (premium)


🔹 What is a Put Option?
 
A put option gives the right to sell an asset at the strike price.


🔸 Scenario (Put Option)
  • Strike price = $100
  • Premium = $5
 
👉 If market price falls to $80:
  • Buy at $80
  • Sell at $100
  • Profit = $20 − $5 = $15
 
👉 If market price rises to $120:
  • Do not use the option
  • Loss = $5 (premium)


🔹 Key Points (Note Form)
  • Option contract → Right, not obligation
  • Strike price → Fixed agreed price
  • Premium → Cost paid for the option
  • Call option → Profit when price goes up 📈
  • Put option → Profit when price goes down 📉


🔹 Simple Summary
  • Option = choice with a cost (premium)
  • Call = right to buy
  • Put = right to sell
  • Strike price = agreed price
 

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KembaraXtra – Islamic Derivatives: Call Option & Put Option Using Goods (Simple Scenarios)


🔹 Call Option (Goods Example)
 
👉 A call option gives the right to buy goods at a fixed price.
 
🔸 Scenario (Using Wheat 🌾)
  • You pay a premium of $5
  • You get the right to buy 100 kg of wheat at $100 (strike price) in 1 month
 
👉 If market price rises to $130:
  • You buy wheat at $100
  • Market value = $130
  • Profit = $30 − $5 = $25 ✅
 
👉 If market price falls to $90:
  • You don’t use the option
  • Loss = $5 (premium) ❌


🔹 Put Option (Goods Example)
 
👉 A put option gives the right to sell goods at a fixed price.
 
🔸 Scenario (Using Rice 🍚)
  • You pay a premium of $5
  • You get the right to sell 100 kg of rice at $100 (strike price) in 1 month
 
👉 If market price falls to $70:
  • You buy rice at $70
  • Sell at $100
  • Profit = $30 − $5 = $25 ✅
 
👉 If market price rises to $120:
  • You don’t use the option
  • Loss = $5 (premium) ❌


🔹 Key Idea
  • Call option (goods) → Profit when price goes up 📈
  • Put option (goods) → Profit when price goes down 📉
  • Premium = small cost for flexibility


🔹 Simple Summary
  • Call → Right to buy goods cheaper later
  • Put → Right to sell goods higher later
  • If not profitable → you only lose the premium


 

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KembaraXtra – Islamic Derivatives: Call & Put Options Using Palm Oil (Malaysia Example)


🔹 Call Option (Palm Oil Example 🌴)
 
👉 A call option gives the right to buy palm oil at a fixed price.
 
🔸 Scenario
  • You pay a premium of RM50
  • You get the right to buy 1 ton of palm oil at RM4,000 (strike price) in 1 month
 
👉 If market price rises to RM4,500:
  • You buy at RM4,000
  • Market value = RM4,500
  • Profit = RM500 − RM50 = RM450 ✅
 
👉 If market price falls to RM3,800:
  • You do not use the option
  • Loss = RM50 (premium) ❌


🔹 Put Option (Palm Oil Example 🌴)
 
👉 A put option gives the right to sell palm oil at a fixed price.
 
🔸 Scenario
  • You pay a premium of RM50
  • You get the right to sell 1 ton of palm oil at RM4,000 (strike price) in 1 month
 
👉 If market price falls to RM3,500:
  • You buy at RM3,500
  • Sell at RM4,000
  • Profit = RM500 − RM50 = RM450 ✅
 
👉 If market price rises to RM4,300:
  • You do not use the option
  • Loss = RM50 (premium) ❌


🔹 Why This Example Is Important
  • Palm oil is a real commodity widely traded in Malaysia
  • These examples show how options are used for:
    • Hedging risk (protecting prices)
    • Speculation (seeking profit)


🔹 Simple Summary
  • Call option (palm oil) → profit when price goes up 📈
  • Put option (palm oil) → profit when price goes down 📉
  • Premium = small cost for flexibility
 

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KembaraXtra – Islamic Derivatives: Time Limit & Exercising Call and Put Options


🔹 Is There a Time Limit?
 
👉 Yes — every option contract has a time limit, called the expiry date.
  • You can only use (exercise) the option within this time
  • After the expiry date → the option becomes worthless


🔹 When Can You Exercise the Option?
 
This depends on the type of option:


🔸 1. American Option (Flexible)
  • Can be exercised anytime before expiry
 
👉 So:
  • Call option → exercise when price is above strike price 📈
  • Put option → exercise when price is below strike price 📉
 
✔ You can choose the best time


🔸 2. European Option (Restricted)
  • Can be exercised only on the expiry date
 
👉 Even if prices are favorable earlier:
  • You must wait until the end


🔹 Example (Simple)
 
Call Option:
  • Strike price = RM4,000
  • Expiry = 1 month
 
👉 If market price becomes RM4,500:
  • American option → exercise anytime before expiry ✅
  • European option → wait until expiry ❗


Put Option:
  • Strike price = RM4,000
 
👉 If market price drops to RM3,500:
  • American option → exercise anytime ✅
  • European option → only at expiry ❗


🔹 Important Idea
 
✔ You don’t have to exercise immediately
✔ You choose the most profitable time (if allowed)
✔ But you cannot go beyond the expiry date


🔹 Simple Summary
  • Yes, there is a time limit (expiry date)
  • American option → exercise anytime before expiry
  • European option → exercise only at expiry
  • After expiry → ❌ no value
 

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KembaraXtra – Islamic Derivatives: Can Call Option and Put Option Exist in the Same Contract?


🔹 Short Answer
 
👉 Yes, they can — but it depends on how the contract is structured.


🔹 1. Separate Contracts (Most Common)
 
Usually:
  • A call option and a put option are two different contracts
 
Example:
  • You buy a call option (right to buy)
  • Someone else buys a put option (right to sell)
 
👉 These are normally not combined


🔹 2. Combined in One Strategy (Yes, Possible)
 
Sometimes, both are used together in a strategy, such as:
 
🔸 Straddle Strategy
  • You buy:
    • 1 call option
    • 1 put option
  • Same asset, same strike price, same expiry
 
👉 You profit if price moves a lot (up or down)


🔸 Scenario (Palm Oil 🌴)
  • Strike price = RM4,000
  • Buy:
    • Call option (premium RM50)
    • Put option (premium RM50)
 
👉 Total cost = RM100
  • If price rises to RM4,500 → call option profits ✅
  • If price drops to RM3,500 → put option profits ✅
 
👉 You win if the market moves significantly


🔹 3. In One Contract (Rare/Structured)
 
Some financial products may combine both rights in one contract, but:
  • This is more complex and structured
  • Not common in basic trading


🔹 Shariah Perspective (Important)
  • Combining both often increases:
    • ❌ Speculation
    • ❌ Uncertainty (gharar)
  • So it is generally not acceptable in Islamic finance


🔹 Simple Summary
  • Usually → call and put are separate contracts
  • Can be combined → in strategies like straddle
  • Same contract → possible but uncommon
  • Islamic view → ❌ generally not permissible
 

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