What the Shariah Law Says About Forex Swaps

If take advantage of a forex Islamic account, you can use it as a head to minimize your exposure to fluctuating and volatile prices of foreign currency pairs. Actually, there are three types of Islamic accounts: the profit rate swap, the cross-currency swap, and the forex swap. Today, I will be discussing with you the Islamic forex swap.

Being a derivative instrument, the main objective of a forex swap is to hedge against any erratic fluctuations in the price of a foreign currency pair. It is different from a forward contract because the foreign currency pair can be exchanged and re-exchanged prior to the expiration date. Having 2 exchange stages, the first exchange occurs at the start and the other exchange occurs at the end of the contract.

Shariah law prohibits this type of exchanges because the 2nd exchange occurs at a different time in the future. Its rule states that any exchange of currencies can’t be done in a forward contract. To remedy this dilemma, the Islamic forex swap is introduced which is based on a tawarruq contract. This type of forex swap has 2 sets of tawarruq which will protect the investor from risks of fluctuation of forex rates.

Contrary to common beliefs, people who abide by the Shariah law can still trade foreign currencies just like the others. However, Islamic forex accounts have special features in order for Muslims to be allowed to dabble into forex trading. I have such account with my broker and have been trading foreign currencies with confidence that I’m not, in any way, disobeying any part of the Shariah law.