An option or the right of choice which is given to either party (or both parties) or to a third party to a commutative contract to revoke or cancel the contract under certain conditions or circumstances. For example, the buyer can return the object of sale and recover the price if the object is found to be defective or incomplete, etc (this khiyar is known as khiyar al ayb). From a shari’a perspective, there are different types of khiyar including: khiyar al-shart, khiyar al-majlis, khiyar al-wasf, etc.

Similar to a conventional option, khiyar may either be embedded in a contract (ancillary khiyar) or stand-alone (product khiyar). An ancillary khiyar is a type of khiyar (option) that is embedded in, or associated with, an Islamic finance arrangement (contract). By nature, this khiyar is part of the structure of the transaction and doesn’t stand out by its own.

A product khiyar, on the other hand, is a type of khiyar (option) that constitutes, by nature and structure, a full-fledged Islamic finance arrangement which is used as a product, per se. It is a stand-alone product that is not made part of a broader structure (i.e., it not ancillary or supplementary to a host contract). It may also be used for hedging purposes (purely as a risk management product). A product khiyar may come in the guise of a single transaction or a series of transactions, whether at present time or in the future.