Islamic Forex Forward

Islamic Forex Forward
The most Islamic forex forward structure

is based on waad, where the first party
promises the latter party to buy or sell
currency for settlement on a forward date
at the rate and amount agreed today.
The party who makes the promise is
obliged to honour the contract, however,
the other party is not obliged to do the
same. The mechanism is illustrated in the
following figure
1
2
Customer Bank
1. The customer promises on 24th June 2015 to buy USD 10

million from the Islamic Bank on 24th July 2015 at the
exchange rate of 3.27 MYR/USD. The customer is bound
by the unilateral promise.
2. On 24 July 2015, the bank pays USD 10 million to the
customer and receives MYR 32.7 million from the
customer.
The currency exchange is complete and the customer

receives USD 10
million at the exchange rate 3.27 regardless of the market
rate.
Islamic Forex Swap based on Wad
The following structure is based on wad and Bay
al-sarf. This arragement consist of an exchange of
currencies (bay al-sarf) at the beginning of the
arrangement followed by an undertaking wad by
the customer to enter into another bayal-sarf on a
future date based on the rate determined today.
On
the predetermined future date, the second bayal-
sarf takes place at the rate which was promised at
an earlier date, to get back the original currency.
An investor has USD 25.5 million, but want
to invest in Bahrain Dinar (BHD). At
0.38BHD/USD spot exchange rate, if the
investor exchanges USD to BHD, the
receipt will be BHD 9.69 million that the
investor can invest in the intended sector.
Say after one year, when the investment
expires, the investor wants to get back
USD25.5 million without being exposed
exchange rate risk. The forex swap aims to
protect the investor from this risk.
1. Bayal-sarf
USD 25.5 million
BHD 9.69 millon
2. Wad
Investor promises to buy USD 25.5 million on a

future
date at a rate determined today (0.40BHD/USD)
2. Bayal-sarf on expiry
BHD10.20 million
USD25.5 million
At the beginning of the forex swap, the investor that has
USD25.5 million, sells the amount to the bank on a spot
basis. At 0.38 BHD/USD spot exchange rate, the investor
receives BHD 9.69 million. This complies with the bayal-
sarf principles which require the transaction to be
concluded on spot.
Subsequently , the investor enters into wad where the
customer promises to enter into a currency exchange
contract to buy USD 25.5 million based on the principles
of bayal-sarf on determined future date at the exchange
rate determined today, so that on the future date, the
investor is not exposed to the risks of currency
fluctuation.
At 0.40 BHD/USD exchange rate, the investor will receive
back USD25.5 million by paying BHD10.20 million in the
second bayal-sarf.
Islamic Option
One of the Islamic option structure is forex, wad, which
is very similar to the conventional option. It uses wad
which is binding on one party with a fee. On the start
date of the transaction, the bank will undertake to the
customer to exchange currency 1 against Currency 2 at
a pre-agreed rate on a future date. On the same date,
the bank will receive a fee from the customer for its
undertaking.
On the option maturity date, the customer might ask
the bank to fulfill its promise, or might release the bank
from its undertaking. If the customer wants to execute
the wad upon the maturity date, the bank and the
customer will exchange the currencies.
The customer will want to execute the wad if the
currency rate is favorable to him. The upside of
this contract is that the customer can wait and
see whether the wad is more favorable or less
favourbale that the prevailing market rate.
However, the customer is required to pay a fee
for the wad.
Islamic Cross Currency
Swap
The Islamic cross currency swap (ICCS) is bilateral
agreement between tow parties to make regular
payments to each other at an agreed interval, but
in two different currencies. It is used as a risk
management tool to hedge both the foreign
currency rate and profit rate risk. The bilateral
payments can be done in different
arrangements : Fixed exchange rate swapped
with floating exchange rate (for example : based
on Kuala Lumpur, KLIBOR, floating-floating, fixed-
fixed or floating-fixed. A commodity transaction is
used at every settlement date.

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Islamic Forex Forward

The most Islamic forex forward structure

1. The customer promises on 24th June 2015 to buy USD 10

The currency exchange is complete and the customer

BHD 9.69 millon

Investor promises to buy USD 25.5 million on a

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