 In the previous module, we looked at the permissibility or imprimissibility of an option contract, a conventional option contract. In this module, we would look at the options from a Sharia viewpoint with a view to come up with a Sharia compliant options contract. So this is a module on Sharia compliant risk management. The tool which we are going to use to construct a Sharia compliant option is called Arbun. Arbun is actually the advance payment. Whenever you want to buy something from someone, you do not have the full amount of money. You give it a Biana. This Biana is called Arbun in Arabic language. So Arbun is the provision of advance payment in a sale contract. So this Biana can be used to construct a Sharia compliant option. Let us see. A buyer wants to buy an asset for which they want to pay an advance payment to pay the rest at the time of the delivery of the asset. This is by the way acceptable from Sharia viewpoint. Although there is a minority humbly view which prohibits it, but majority of Sharia scholars, they accept this kind of arrangement. Some scholars argue that there is no optionality in such a contract. I.e. once you have paid the Biana, Arbun, you cannot change your mind. So if you change your mind, then the seller can take you to the court and ask you to compensate for the actual law. This is a view taken by some Sharia scholars. Others actually say that the optionality element is an essence of an Arbun contract or an Arbun within a sale contract. If so, then the Arbun offers a Sharia compliant solution to a conventional call option. However, in this case, if we are using Arbun as a basis for a Sharia compliant call option, then the advance payment would be deemed as part of the final payment of the price when the Arbun giver strikes. In the conventional options that premium of $5 is not part of the price which is paid at the end or on the strike day. In case of an Arbun-based call option, however, when the buyer exercises his right of confirming the sale, at that point in time, this Arbun price would be deemed as part of the total price. Let us look at our previous example and try to explain it with the help of an Arbun-based call option. At t0, this time buyer buys an Apple stock for $155 with the provision of paying $5 upfront and paying the rest of the amount at the time of the delivery at t30. Now, in this case, the price is $155 out of which $5 have already been paid. Now, like the previous example, if at t30, the price of Apple stock has gone up to $165, the buyer who has paid Arbun, the option holder would strike and pay rest of the amount which will be $150 and confirm the sale. In this case, of course, again like the conventional case, the call option holder would be benefiting from the difference of the price between the two. So, that would be $165 minus $155 i.e. $10. If on the other hand side, the Apple stock price crashes down to $65 on t30, in that case, the Arbun call option holder would not confirm the sale. Now, in different jurisdictions, the view taken by the scholars is different. If at this point in time t30, the buyer reneges on the contract, the buyer says, I don't want to go ahead. As I said earlier, the seller can take this buyer to the court. So, this will be part of the risk management in an Arbun-based call option to ensure that the advance payment which is paid at the beginning is almost equal to the opportunity cost of the seller i.e. the actual loss of the seller because of the buyer reneging on the contract. In that case, this would be an arrangement which would be compatible from incentives viewpoint. If the Arbun paid is too less as compared to the opportunity cost and associated loss with it for the seller, then a dispute may occur in that situation and the Arbun giver might end up paying a lot more than what he was going to benefit from. In case there was favorable market condition with respect to this stock i.e. Apple stock. Now, the actual loss actually is going to be known in future and only an expectation can be built around it at the time of the start of the contract i.e. t0. Important thing in this whole message is that if someone is going to use Arbun as an option, call option, then due consideration should be given to a number of risk, legal risk and of course, the risk that the seller may take the buyer to the court in case the buyer reneges on the contract.