Question

b. In practice, most derivative transactions end with cash settlement instead of physical delivery. Briefly explain what is meant by "cash settlement". Provide TWO (2) reasons why cash settlement is typically preferred over physical delivery (3+4-7 marks) c. Some scholars are of the opinion that futures contracts are not permissible from a Shari ah point of view, arguing that the futures contract contain excessive uncertainty or gharar. Provide TWO (2) counterarguments that have been used by other scholars who advocate that futures contracts are permissible from a Shari ah perspective (to argue that there is no or little gharar).

Answer 1

b. 1. In Cash setlements ,at the end of the contract the holder of the position is simply debited or credited the difference between their entry price and the final settlement while in physical delivery at the end of the contract the holder of the position will either have to deliver the physical commodity if short or take delivery if long

2. Cash settlements have enabled the traders to buy and sell contracts on indices and certain commodities which are either impossible or impractical to physically transfer.

3. it is a preferred method since it helps in reducing the transaction costs which otherwise would be expenditure in case of physical delivery

c. 1. Ibn Qudama made a significant statement that Allah permitted sale but did not specify the manner in which it was to beconcluded. Niazi supported this idea and emphasized that there is no fixed formalities in contract under Islamic Law. He further added that what under Islamic Law, the fundamental proof of consent by each party is required as in any other legal system. Consent is discovered by the use of the offer and acceptance methodology. The offer or ijab and acceptance qabul must meet at the same time and meeting or majlis

2.The consent of the two contracting parties should be the main pillar in any contract under Islamic law. Thus, mutual agreement is the basis of a contract. In Islamic law such concept is based on the Quranic verse which states to the effect:“O you who believe! Squander not your wealth among yourselves in worthless dealings but let there be trade by mutual consent”.