Islamic options pricing model via artificial neural network: “Benchmarking to Black-Scholes”

Abstract

Islamic finance industry has grown fast recently especially when Arab countries make huge investments with their oil money. The rapid growth has made the industry players search for a better risk management mechanism. This has led to the introduction of Islamic options based on urbun principle. Urbun defined as deposit to the sale purchase transaction has become popular as the most viable alternative to the conventional option. This research paper's objective is to model Islamic options based on the urbun principles and shows how it can be differentiated from the conventional options. Artificial neural network has been popular recently for its application in pricing options; therefore it would be used in the research to price the Islamic option with Black-Scholes as its benchmarking. The result shows that artificial neural network is capable of pricing the Islamic options; however the lack of information provided by this model may be a concern.

Pricing of Al-Urbun and a Class of Al-Istijrar Islamic Contracts under the Black–Scholes Framework

“…In [11], the authors' objective was to model Islamic options based on the Urbun principles and show how it was distinct from traditional options. With Black-Scholes as its benchmark, the authors use an artificial neural network to price the Islamic option.…”