 In this module, we shall continue with our discussion on risk management in Islam. In the previous module, we highlighted that the risk can be dealt with by way of avoiding it, by taking some measures to minimize its incidence and of course by sharing it. In this module, we shall use another specific example of risk management by way of our prohibition. And I mean by this prohibition of trading in options. Broadly speaking, there are two types of options put and called and those of you who have taken courses on finance, you would be aware of the differences between the two and of course their definitions. When someone buys a put option, they buy the option to sell in future. When someone sells a put, they buy an option to buy in future. In case of an American put or call option, the option holder can strike any time between the execution date and the expiration date. This is the American option concept. In case of a European option, the option holder can strike only at the expiration date. So this is an important difference between the American practice and the European practice. The options are bought by way of paying a price. So there is a price to buy an option. It is called premium, which is only a fraction of the actual price of the asset. Obviously, Islam prohibits trading in options because they are akin to gambling. Now, before I go to the next slide, I must explain why there is prohibition of buying option. There are certain things which do not have a value in the eyes of Islamic law. If this table has a value, of course you can buy and sell it. Certain rights, they cannot be bought and sold. Option is actually a right to buy or sell. Nothing more than that. So this right cannot be bought and sold on its own. Like Hakke Shuffa. You must have heard of it. If you have not heard of it, then ask your parents. Hakke Shuffa is that if your neighbor wants to sell his house and he is dealing with someone else, then you have a right to preempt this sale. It is called preemption right. Islam does recognize Hakke Shuffa or preemption right. However, Islam does not allow the neighbor, you, to actually sell this right to someone else or even to the owner of the neighboring house. You cannot say that when you have preempted Hakke Shuffa, then your poor neighbor can say that you can buy it. The price you want to pay, you can give it. You can say that you do not want to buy it. But you can give us money so that we do not use Hakke Shuffa. Islam embodies this. So there are rights which cannot be bought and sold. Similarly, this right to buy or sell in future, this cannot be bought and sold in an Islamic economic slash legal framework. Let us look at an interesting example. There is an option seller, this one, and there is an option buyer. Option buyer actually buys an option on Apple stock. Apple stock is a stock which is listed on New York Stock Exchange. So this option allows the option buyer to strike on a future date T-30. Say today, the price of Apple stock is 150. Today Apple stock is around 149, 148 and so on. And the option buyer actually pays $5 to buy this option on a strike price of 150. Now, if in the future, from today, under 30 days, if the market price of Apple stock moves like this, in such a way that on T-30, i.e. after 30 days, the price of Apple stock is actually 165. And this call buyer, call to buy, call buyer has actually negotiated this strike price, $150. So at T-30, the market price of Apple stock is 165, but because this call buyer has bought or had bought the option for $5, it would strike and would buy the stock for $150. In this case, the difference between the market price and the strike price is $15. So $15 minus $5 of premium the call buyer would be benefitting by way of earning $10 from this option. If on the other hand side, the Apple stock had moved this way, in such a way that the price of Apple stock on T-30 was $65. In that case, the difference between the strike price and the actual market price on T-30 would be $85. Of course, the call buyer would not be interested in striking because striking would mean that the call buyer would be buying something for a lot more than what is the actual market worth of the stock at that point in time. So in this case, the call buyer would be losing $5. Sharia scholars, they take a view that this is actually quite close to gambling. So I pay $5 and a stochastic process, you know, throwing a dice. This is a stochastic process. Tossing a coin. This is a stochastic process. The movement of prices in the stock market. This is a stochastic process. So when I buy something in such a way that a stochastic process which is beyond my control would or could benefit me, that is actually called gambling.