Also known as urbun. In an arbun transaction, a buyer makes a down payment toward the purchase of an asset at a specified price (strike price) within a specific time period (exercise period). If at the time the buyer wishes to buy the asset, the market price of the asset is:
Higher than the strike price, the buyer will conclude the arbun transaction by paying the balance of the strike price.
Lower than the strike price, the buyer will elect not to conclude the transaction and the seller will keep the deposit.
The arbun structure is often used to effect a Sharia ( www.practicallaw.com/9-500-7092) -compliant option because it resolves the uncertainty inherent in a conventional or western option (for example, whether and when the option will be exercised) and which violates the Sharia principle against gharar ( www.practicallaw.com/5-500-7094) .
For more information on Islamic finance in the US, see:
For more information on Islamic finance in the UK, see Practice notes: