EMBEDDED OPTIONS AND THE ISSUE OF GHARAR: EMPIRICAL EVIDENCE FROM MALAYSIA

Authors

  • Razali Haron

Abstract

Despite its accelerating use in the financial market, embedded options receive contradicting opinions with regards to its permissibility based on Shari‟ah principles. This study will examine the existence of the gharar element in the pricing of embedded options (warrants), especially in the case of mispricing. The Black Scholes Option Pricing Model (BSOPM), a robust set of methods, is used to analyze the pricing efficiency of warrants market and to detect any mispricing in warrants contracts in Malaysia. Looking from the perspective of an informationally efficient market, there seems to be a pricing inefficiency in the local warrants market in reference to its theoretical values. This mispricing of warrants indicate inefficiency in the warrants market and the element of gharar in a warrants contract is viewed from the mispricing detected in the study. Mispricing of warrants in the Malaysian market indicates speculative activities, and speculation is not allowed in Islam. Speculation is prohibited in Islam as it may contain excessive gharar (uncertainty) and maysir (gambling). These may then result in wealth accumulation at the expense of the jahil (ignorance) other parties‟. This activity violates the concept of adl (justice), does not serve the concept of maslahah (public interest) and does not comply with maqasid al-shari'ah.

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How to Cite

Haron, Razali. 2016. “EMBEDDED OPTIONS AND THE ISSUE OF GHARAR: EMPIRICAL EVIDENCE FROM MALAYSIA”. Al-Shajarah: Journal of the International Institute of Islamic Thought and Civilization (ISTAC), May. https://journals.iium.edu.my/shajarah/index.php/shaj/article/view/339.