FX wa'ad helps hedge exposure, cut risk from extreme volatility

Islamic banks can offer customers spot value date transactions, which are for settlement in two working days, or at a pre-agreed date and price in the future, which would be covered under the "foreign exchange wa'ad". Islamic foreign exchange swap is a contract that is designed as a hedging mechanism to minimise market participants' exposure to volatile and fluctuating market of currency exchange rates. The FX swap involves two stages of exchange at the beginning when the first currency exchange takes place and the dollar or other currency is converted to the other currency based on the spot rate. On the same day, both sides will sell a forward contract to other currency back to the dollar or other exchanged foreign currency at a forward rate.