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Arbun Risk Management and Options

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Chapter Summary

This chapter presents a way to formulate a type of contract that fulfills the objectives of options as a means of risk management and the possibility of transferring it from one investor to another. ʿArbūn has some similarities with options. Thus, the basic rationale of options resembles that of ʿarbūn especially in the sense that both can be used as risk reduction strategies, or a method by which traders might wish to give themselves flexibility before committing themselves to large contracts. The possible alternative to a put option in connection with ʿarbūn is to include a condition in the contract that if the seller fails to fulfill his contractual obligations, he should pay the buyer a certain amount in the form of reverse ʿarbūn. Although the issue has not been directly addressed by the classical scholars, the case of ʿarbūn in salam is somewhat similar to this one.

Keywords: ʿArbūn risk management; call option; contractual obligations; Islamic alternative; put option



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