ISLAMIC COMMERCIAL LAW

Abstract

This essay is presented in two sections. Section one is devoted to a market analysis of options, and section two to a Shari'ah perspective on options trading. There is no real shortage of information in the operational procedures of options and the various ways in which options are utilized as trading vehicles and hedging and risk-reduction devices. On the other hand, there is a shortage of in-depth information analyzing options trading from the perspective of the Shari'ah. The second part of this essay is tentative, in part because certain aspects of the issue need further development and research. The literature on the subject is in its early stages and has not reached a stage where consensus on issues can be identified. This is borne out perhaps by the divided opinion that we have at present over the basic question of the validity or nonvalidity of options from an Islamic legal perspective. I shall review these two opposing currents of opinion in due course. Suffice it here to note that this presentation does not seek to advocate the validity of those varieties of options which either directly or indirectly proceed on the charging of fixed interest to accounts. This may be said to be one of the distinctive features of the Shari'ah perspective on options-just as it is of all varieties of commercial transactions in Islamic law. My review of the mechanics of options trading in the first section of this essay broadly indicates that options trading does not proceed on charging of fixed interest, nor does it involve unwarranted risk taking and uncertainty (gharur). Options trading has a logic of its own, which is dominated by the idea of risk reduction and hedging against excessively large positions in its underlying assets. From the perspective of Islamic law this aspect of options is attractive and hence, from this perspective I make the case for the legality of options. I may also add here in passing that options trading cannot be equated with gambling or overindulgence in financial speculation. as it is basically designed to ...