MARKAZ Completes Structuring of the Shari’a Compliant Alternative for Call Options


Kuwait Financial Centre 'Markaz', one of the leading asset management and investment banking institutions in the Middle East, announced the completion of an Islamic Call Option Structure called ‘Purchase through Arboun Contract’ which is a Shari’a compliant alternative to conventional Call Options. " Since the initiation of options trading at the Kuwait Stock Exchange (KSE) in 2005, many investors were interested in options; however they did not trade this instrument as it is considered non-compliant to Shari’a principles. Therefore, we took the initiative in developing a structure that is similar to the current Call Options traded at the KSE, but compliant with the Shari’a principles”, said Mr. Hussein Zineddine, Assistant Vice President – Derivatives. “We were able to come up with a structure ‘Purchase through Arboun Contract' which is very similar to the conventional Call Option from a risk-return perspective. The "Purchase through Arboun Contract" is a contract in which the buyer purchases shares at a predetermined price on a down payment called Arboun with a right but not obligation to pay the remaining amount of the purchase price and receive the shares within a predetermined period (Expiration). If the buyer does not exercise his right to receive the shares within the predetermined period, the Arboun remains with the seller of the Contract,” Mr. Zineddine added. ‘Purchase through Arboun Contract’ is an Islamic product that is issued only on shares of Shari’a compliant companies. It is the first of its kind in the region and the world where it can be priced and hedged with the same pricing and hedging mechanisms used for the American type Options. Besides, it can be both cash and physically settled at anytime on or before the maturity date thereby providing liquidity to investors. ‘Purchase through Arboun Contract' has the same features of the call options in general where it allows investors to apply a number of strategies and provides financial leverage. It also widens the range of trading opportunities available to investors that provides a blend of return and risk, without the need for large capital to achieve gains out of market movement. “The product structure along with its trading and pricing mechanism is ready and has been approved by a Shari’a Board that was formed of a group of specialized and well known Islamic Scholars. The product has been submitted to the Kuwait Stock Exchange for their review and approval. If approved, Kuwait Stock Exchange will be the first bourse in the region and the world to offer this type of Islamic derivative,” said Mr. Zineddine. Options trading did not exist in the Middle East Stock Exchanges until Markaz proposed a system for options trading to the Kuwait Stock Exchange in 2002. In 2005, “Forsa Financial Fund”, the first and sole derivatives fund in Kuwait and the Middle East, was launched to work as a Market Maker for options trading. Being the pioneer of the derivatives market in Kuwait, Markaz understands the importance of a developed derivatives market and continues its efforts to increase the presence of the derivatives and structured products in the region. Markaz's Structured Finance team continues to be the only market maker for options at the Kuwait Stock Exchange, entailing the high level of skills, experience and resources acquired by Markaz to perform such operations with high level of professionalism Markaz will continue to expand derivatives’ capability regionally; dealing with legal and regulatory constraints will remain the primary challenge to progress. In 2008, Markaz plans to expand the options products range to include put options, index options and to allow investors to write options through the market maker. Markaz also plans allowing the trading of options during trading hours. ### Photo Caption: Mr. Hussein Zeinnedin, Assistant Vice President – Derivatives at Kuwait Financial Centre “Markaz” About Markaz Kuwait Financial Centre 'Markaz', with total assets under management of over KD1.3 billion as of December 31, 2007, was established in 1974 has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region. Markaz was listed on the Kuwait Stock Exchange (KSE) in 1997; and was recently awarded a BBB+ corporate rating by Capital Intelligence Ltd.