The objective of this research is to provide a clearer understanding of the options contract in Islamic finance. Option contracts provide economic benefits of hedging and flexibility of use; however, they are also used for speculative purposes that contravene the Shari’ah. Options are also objected to because of the payment of a premium, and conditional options are not allowed in currency exchanges. Islamic options have been engineered, and some Islamic banks do use them for hedging purposes. This paper begins with an explanation and description of options in conventional finance, including the benefits, and moves on to explain the Shari’ah view on conventional options. The paper then moves on to describe Islamic options that exist within Islamic finance itself— urbun (earnest money), hamish jiddiyyah (security deposit), and khiyar al-shart (stipulated option)—and thereafter explains Islamic options created by Islamic banks to hedge against risk, focussing specifically on currency risk, sukuk (Islamic bonds) and commodity hedging. The paper concludes by discussing which types of options may be deemed to be acceptable from a Shari’ah point of view.
Keywords: Options, speculation, hedging, gharar, wa’d
