Firstly: The Economic Effects of Contemporary Financial Options Contracts from the Perspective of Traditional Economics [1].
From the perspective of those who deal with contemporary financial options contracts, they have positive economic effects [2] on financial markets; they are considered a kind of insurance that provides protection for the buyer from the risks of fluctuations in the prices of currencies or securities in which they deal. At the same time, they do not prevent them from making profits when their expectations are correct.
Therefore, we will present these effects of options contracts - from their perspective - as follows:
1. Mitigating the Volatility of Foreign Assets [3]:
From the perspective of traders, options contracts can be used to reduce the volatility of foreign assets. An investor in foreign currencies can sell some of the call options on a portion of their foreign assets.
If foreign exchange rates rise, the remaining portion of their assets will increase in value, while the buyers of the call options will exercise their right to purchase the sold portion at the agreed-upon price.
On the other hand, if foreign exchange rates decrease, the value of the entire portfolio will decline, but the premiums received from selling the call options will offset some of this loss.
If exchange rates remain unchanged, the premiums received will undoubtedly increase the overall return on the portfolio.
Thus, options contracts, in all cases of foreign exchange rate fluctuations, whether they rise, fall, or remain stable, allow the holder to largely preserve the value of their foreign currency assets. This is considered an economic advantage for them, as it maintains the value of their foreign currency holdings.
2. Protecting Export and Import Payments:
An exporter who expects to receive a specific amount of a certain currency at a future date can protect themselves against fluctuations in the price of this currency through options contracts. This can be done by purchasing the necessary number of put options, which give them the right to sell the specified currency on the contract's expiration date at the agreed-upon price if they find it beneficial. If the price of the currency to be sold increases, they can sell it on the market at the prevailing high prices; thus, they have protected themselves against the risk of fluctuations in the prices of the currencies they will receive in the future as payment for their exports. The same applies to an importer who wants to hedge against an increase in the price of the currency they will pay in the future for their purchases. They can do so by purchasing the necessary number of call options, which also gives them the right to buy the specified currency on the contract's expiration date at the fixed price if they find it beneficial.
If the price decreases, they will certainly resort to the market to buy what they need[4], thus realizing a profit - which is the difference between the price of the currency at the time of the contract and its price at the time of execution - and, on the other hand, they have protected themselves against the risk of fluctuations in the price of the currency they would have paid for their imports.
3. Contributing to the Creation of Continuous and Perpetual Markets:
Those who deal in contemporary financial options believe that these contracts can contribute to the creation of perpetual markets. This is due to the existence of a sufficient number of traders who are willing to buy and sell at any time, as well as allowing for short selling. A seller can enter into a transaction for an asset they do not currently own, relying on their ability to acquire it later due to the continuous nature of the market[5].
4. More Efficient Use of Financial Resources:
Those involved in contemporary financial options believe that these options allow for a more efficient use of financial resources. For instance, someone with 1000 riyals can operate in the financial markets as if they had a much larger sum; by purchasing an option instead of the underlying asset itself, they can benefit from price increases or decreases to a degree that may exceed those who own the underlying assets[6].
5. Gaining Sufficient Time to Decide Whether or Not to Exercise Investment Contracts:
Any investor benefits from having sufficient time to assess the viability of a deal. Therefore, those who deal in contemporary financial options believe that these contracts provide them with this opportunity. By purchasing an option contract, an investor only pays the option premium [7], giving them ample time to make an informed decision about whether to execute the actual transaction.
6. Lowering Risk in Financial Markets:
Investing in financial markets is inherently risky due to price fluctuations and the influence of other investors' sentiments, which are affected by political and economic events. Since investment decisions in financial markets are largely based on future projections, any event that is believed to impact the economic situation will inevitably affect market trends. Therefore, investors need a mechanism similar to insurance to reduce the risk of their investment decisions not aligning with their expectations. According to proponents, options serve this function in financial markets [8].
These are some of the economic implications of options contracts in contemporary financial markets, as seen by their supporters. However, whether these effects are real or not is what we will examine in the third section.
Secondly: The Economic Implications of Financial Options Contracts from an Islamic Perspective:
After reviewing the economic implications of contemporary financial options contracts as seen by their proponents, it is necessary to evaluate them from an Islamic perspective. This is to determine whether these effects are truly positive or not, by examining their underlying motivations and consequences. If they are permissible and approved by Islamic law, then they are considerable. Otherwise, they are not.
A careful examination of these effects reveals that their initial motivation is quick profit based on speculating on price differences, regardless of the terminology used. The ultimate goal is to obtain the maximum possible profit in the shortest possible time and with the least risk.
It is well-known that this profit is gained at the expense of another party, which is considered unjust and rejected by Islamic law.
Moreover, the outcome of these contracts is the negative impact they have on financial markets, causing harm and risk. To substantiate this assessment, we will outline some of the negative economic effects these contracts have on financial markets:
1. Options Contracts as a Tool for Market Manipulation:
If a major trader engages in short selling when they anticipate a decline in prices, other traders often imitate this behavior, considering them a market leader. This leads to a downward trend in prices. Despite this, due to the trader's concerns about market fluctuations and changes in price trends, they resort to selling option contracts at low prices to entice buyers, even though they are not willing to deliver the underlying assets in such circumstances. This is because no one will demand the delivery of these assets unless their price increases. Thus, the issuer of the option manipulates prices to their advantage [9] by issuing option contracts that are essentially fictitious and have no intrinsic economic value. Their value is derived from the market value of the underlying asset, which the issuer often has no intention of delivering.
Therefore, the issuer's intention is not genuine selling, but rather to deceive traders into believing that prices will fall, enticing them to buy these securities in the market, hoping for a price increase. This leads to increased demand and rising prices, allowing the issuer to achieve their profit goals in the shortest time and with minimal risk. Is this not a form of market manipulation?!
2. Options Contracts Do Not Achieve Mutual Benefits for the Contracting Parties:
All contracts that are recognized by law and Sharia aim to achieve mutual benefits for both parties, with relatively balanced gains and losses, even if one party loses and the other gains. However, options contracts are entirely different. Any gain achieved by one party to the contract represents a loss for the other party. In other words, the gain of the option buyer is the same as the loss of the seller, and the gain of the option seller is the same as the loss of the buyer.
Therefore, a contract that results in one party benefiting at the expense of the other is contrary to all contracts recognized by law and Sharia, and it is only comparable to gambling [10].
3. The Negative Impact of Options Contracts on Wealth Distribution:
By examining the price fluctuations caused by options contracts in financial markets, it becomes clear that one party benefits at the expense of another. This has a negative impact on the distribution of wealth among individuals. This impact is manifested in the following ways:
A. Gains in Options Contracts Represent Losses:
As previously explained, the gain of an option buyer is equivalent to the loss of the seller, and vice versa. This means that there will always be a winner and a loser. This, in turn, has a negative impact on the distribution of wealth among individuals. Wealth will concentrate in the hands of the winning group, namely large speculators. These large speculators can manipulate prices to their advantage, leading to a concentration of wealth in their hands and the bankruptcy of smaller players.
B. Options Contracts Fuel Speculation in the Financial Market:
One of the main motivations for investors to engage in options contracts is speculation on price differences. This is driven by the desire to achieve high profits by taking advantage of short-term changes in the market value of securities [11].
This prevalence of speculation in the financial market leads to the circulation of large amounts of money among traders in pursuit of maximum profits. Under these circumstances, major speculators can manipulate these funds to their advantage by influencing and manipulating prices. They do this by issuing options contracts to sell large quantities of securities they own at low prices, which encourages smaller traders to follow suit by buying these securities in the hope of price increases. This increased demand leads to higher prices. Through this circulation of large sums of money by major players, smaller traders, who make up the majority, are driven to bankruptcy [12].
4. Options Contracts and Their Negative Impact on Production:
Options contracts have a negative impact on production. This is evident in the fact that investors use them as a hedging tool to protect themselves from the risks of price fluctuations. This means that these contracts have become an incentive for those with capital, pushing them to invest in the financial market (stock exchange) as long as these contracts protect them from losses and do not prevent them from making profits when their expectations are correct. This diverts many capital owners from engaging in real productive activities that society needs, such as manufacturing, agriculture, and mining, and leads them to wait for profit-making opportunities that may arise from price changes. If their expectations are correct and they make profits, they become even more attached to speculation, which means that the circulation of these individuals' capital is far removed from the cycle of economic activity.
In conclusion, the opportunities that may be available to speculators sometimes require ready funds to be seized. This means that those who engage in speculation will keep their liquid funds or a portion of them and will not use them, waiting for profit-making opportunities. Moreover, they will not allow others to use them for production [13].
5. Options Contracts Contradict the Principle of Justice:
The fundamental principle of all contracts is justice. Options contracts, however, do not adhere to this principle. They are unjust to one of the contracting parties. This injustice lies in granting one party the opportunity to profit at the expense of the other. This is made possible by the ability of investors to predict future prices of securities and compare them to the contract price, then decide whether to execute the contract, terminate it, or increase or decrease the quantity.
The results of these speculative maneuvers will benefit one party at the expense of the other. This is contrary to the principle of justice that Islamic law observes in all exchange contracts. This is injustice and oppression, which is forbidden in Islam. [14].
In conclusion, after reviewing the negative impacts of modern financial options contracts, we can say that the options contracts currently traded in financial markets do not have any intrinsic economic value. Consequently, all the economic effects of options contracts promoted by investors are not considered valid in Islamic law. They are merely illusions used to attract investors to inject their funds into the market, only for speculators to seize them. Evidence of this is the fact that 98% of these contracts are not executed, which further proves that these contracts do not have a clear economic value [15].
[1] In a previously published research paper on this website, I discussed contemporary financial options contracts in terms of their meaning, types, and characteristics. In that paper, I addressed the permissibility of dealing in them in financial markets. The full research can be accessed here.
[2] By "positive," we mean that which is permitted and allowed by Islamic law.
[3] Awad, Marwan, Foreign Exchange: Investment and Finance between Theory and Practice, pp. 147-148.
[4] Awad, previous reference, p. 147.
[5] Kazim, Murad, The Stock Exchange, p. 9.
[6] Al-Qari, Muhammad Ali, Financial Markets, p. 1616.
[7] Options Contracts for Secondary Market Shares, Mal wa A'mal Forums.
[8] Al-Qari, Muhammad Ali, Towards an Islamic Financial Market, p. 20.
[9] Radwan, Samir, Securities Markets and Their Role in Financing Development, p. 321.
[10] Radwan, previous reference, p. 252.
[11] Mahdi, Ahmad Mahdi Ahmad, Securities Markets and Their Developmental Impacts in the Islamic Economy, p. 484.
[12] Radwan, Samir, Securities Markets and Their Role in Financing Development, p. 252.
[13] Mahdi, Ahmad, Financial Markets, p. 518, with slight modification.
[14] Radwan, Samir, Securities Markets, p. 362, with slight modification.
[15] Al-Islambouli, Ahmad Muhammad, Futures Contracts and the Opinion of Islamic Law, p. 78, with slight modification.
