Embedded options and the issue of gharar: Malaysian empirical evidence

Despite its accelerating use in the financial market, embedded options receive contradicting opinions with regards to its permissibility based on the Shariah principles. This study will examine the existence of gharar element in the pricing of an embedded options (warrants), especially in the case o...

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Main Author:	Haron, Razali
Format:	Article
Language:	English
Published:	ISTAC 2015
Subjects:	HG4001 Financial management. Business finance. Corporation finance.
Online Access:	http://irep.iium.edu.my/47013/ http://irep.iium.edu.my/47013/ http://irep.iium.edu.my/47013/1/47013_embeded_options.pdf

id	iium-47013
recordtype	eprints
spelling	iium-470132016-07-19T00:01:12Z http://irep.iium.edu.my/47013/ Embedded options and the issue of gharar: Malaysian empirical evidence Haron, Razali HG4001 Financial management. Business finance. Corporation finance. Despite its accelerating use in the financial market, embedded options receive contradicting opinions with regards to its permissibility based on the Shariah principles. This study will examine the existence of gharar element in the pricing of an 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 informationally efficient market, there seemed to be pricing inefficiency in the local warrants market in reference to their theoretical values. This mispricing of warrants indicated inefficiency in the warrants market and the element of gharar in warrants contract is viewed from the mispricing detected in the study. Mispricing of warrants in 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 other parties’ jahl (ignorance). This activity violates the concept of adl (justice), does not serve the concept of maslahah (public interest) and does not comply with the Maqasid al Shariah. ISTAC 2015-12-31 Article PeerReviewed application/pdf en http://irep.iium.edu.my/47013/1/47013_embeded_options.pdf Haron, Razali (2015) Embedded options and the issue of gharar: Malaysian empirical evidence. Al-Shajarah , Special Issues. pp. 149-172. ISSN 1394-6870 ISSN 1394-6870
repository_type	Digital Repository
institution_category	Local University
institution	International Islamic University Malaysia
building	IIUM Repository
collection	Online Access
language	English
topic	HG4001 Financial management. Business finance. Corporation finance.
spellingShingle	HG4001 Financial management. Business finance. Corporation finance. Haron, Razali Embedded options and the issue of gharar: Malaysian empirical evidence
description	Despite its accelerating use in the financial market, embedded options receive contradicting opinions with regards to its permissibility based on the Shariah principles. This study will examine the existence of gharar element in the pricing of an 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 informationally efficient market, there seemed to be pricing inefficiency in the local warrants market in reference to their theoretical values. This mispricing of warrants indicated inefficiency in the warrants market and the element of gharar in warrants contract is viewed from the mispricing detected in the study. Mispricing of warrants in 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 other parties’ jahl (ignorance). This activity violates the concept of adl (justice), does not serve the concept of maslahah (public interest) and does not comply with the Maqasid al Shariah.
format	Article
author	Haron, Razali
author_facet	Haron, Razali
author_sort	Haron, Razali
title	Embedded options and the issue of gharar: Malaysian empirical evidence
title_short	Embedded options and the issue of gharar: Malaysian empirical evidence
title_full	Embedded options and the issue of gharar: Malaysian empirical evidence
title_fullStr	Embedded options and the issue of gharar: Malaysian empirical evidence
title_full_unstemmed	Embedded options and the issue of gharar: Malaysian empirical evidence
title_sort	embedded options and the issue of gharar: malaysian empirical evidence
publisher	ISTAC
publishDate	2015
url	http://irep.iium.edu.my/47013/ http://irep.iium.edu.my/47013/ http://irep.iium.edu.my/47013/1/47013_embeded_options.pdf
first_indexed	2023-09-18T21:06:54Z
last_indexed	2023-09-18T21:06:54Z
_version_	1777410994045190144

Embedded options and the issue of gharar: Malaysian empirical evidence

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