DERIVATIVE SECURITIES

PREPARED BY:
RAJA AMINAH FATNIN BINTI RAJA SULAIMAN (255411)
NUR ATIQAH BINTI NORDIN (255431)
NOR FARIHAH BINTI MOHD ZIN (256132)
TG NUR ALLYSHA BT TENGKU MOHD ZAINUDDIN (255616)
HAMSE RASHID IBRAHIM (249890)
NUR RIS’LAH BINTI MUZAIN (244120)
DEFINITION

 A derivative is a financial asset whose value is dependent on the value of an

underlying assets.
 The underlying assets can be common stocks, bonds, currencies or commodities.
 The common forms of derivative securities are forwards, futures, options, swaps.
THE MAIN PLAYERS

Hedgers Arbitrageurs Speculators

FORWARD CONTRACT
 An agreement between a buyer and seller to trade an asset at a future date.
 Have one settlement date
 These contracts are private agreements between two parties
 Many hedgers use forward contracts to cut down on the volatility of an asset's price
 Because of the nature of these contracts, forwards are not readily available to retail
investors.
 Have a high counterparty risk
FUTURE CONTRACT
 Like forward contracts, futures contracts involve the agreement to buy and sell an asset at a
specific price at a future date.
 First, futures contracts also known as futures are marked-to-market daily
 They are traded on an exchange, they have clearing houses that guarantee the transactions.
 The market for futures contracts is highly liquid
 Frequently used by speculators.
 Both forward and futures contracts involve the agreement to buy and sell assets at a future
date.
 A forward contract, though, settles at the end of the contract, while the settlement for a
futures contract happens on a daily basis.
 Has same function, however, the specific details of each are different.
OPTIONS
 It is a contract that give a buyer the right, not the obligation to buy or
sell the underlying asset at a specific price on a pre-determined date.
 Buy ( call option ) , allow you to buy underlying asset at a specific time
 sell ( put option), allow you to sell shares at a specific time.
 Can be considered as low risk compared to stocks because we can
withdraw at any point.
 Various underlying assets, including stocks, currencies, bonds,
commodities.
 Differences and similarities between conventional options
and Islamic options.

Conventional option Islamic option/ urbun

Premium is not part of strike price
The strike price is fixed
An option is tradable
An option can be on any asset, such as shares and
commodities
Both call and put options are valid
Down payment (premium) is part of strike price.
The strike price is fixed
Option/ Urbun is not tradable (according to shariah
standards and practices)
Islamic options are valid for approved assets, such as
Shariah compliant shares and commodities.
Only call options (right to buy) are valid
SWAP

Derivative in which two counterparties exchange

cash flows and liabilities of one party’s financial
instrument for those of the other party’s
TYPES OF SWAP
Interest rate swaps • Swapping only the interest related cash flows between the parties in the same currency

Currency swaps • Swapping both principal and interest between the parties, with the cash flows from different
currencies

Commodity swaps • An agreement whereby a floating(or market or spot) price is exchanged for a fixed price over a
specified period

Equity swap • Special type of total return swap, where the underlying asset is a stock, a basket or stock, a basket of
stocks, or a stock index

• Financial instrument for swapping the risk of debt default

Credit default swaps • May be used for emerging market bonds, mortgage backed securities, corporate bonds, and local
government bond
WARRANT

 Give the holder the right to buy a stock at a certain price at a

predetermined date
 long-term options that grant the right to buy shares in a certain
company for a given period of time
 Usually warrant used to make the issues more attractive to investor
 gives bondholders the opportunity to earn higher returns
 investors can exercise stock warrants at a fixed price
DERIVATIVES FROM THE ISLAMIC PERSPECTIVE

Generally current scholar objected derivative contract by many reasons:

 Derivate contracts involve exchange of money of different types or genus , currency
of exchange call for the rules of bay al-sarf are violated
 Forward and future contracts deferment of payments of both counter values, are a
sale of one for another known as bay al-day al-dayn which is prohibited in Islam.
 Both counter values, the money and the goods, in forward, future and option sales
are deferred and often non-existent at the time of the contract.
 Future, option and swap trading involve speculation and verge on maysir and gharar ,
the concept of zero sum can rise but speculation per se is not unlawful, yet when
speculation is akin to gambling, it is prohibited.
CONCLUSION

 These instrument could be easily be use for speculation appears to be

the key reason for objection
 The derivatives form of basis of risk-management appears to have been
lost