This fatwa acknowledges a need to protect the value of foreign currency given the uncertainty of the exchange rate (Islamic hedging), and that, to date, shari'a-friendly provisions and instruments to deal with this trend are lacking.
The fatwa states that Islamic hedging is applicable to the following agreements:
- 'Aqd al-Tahawwuth al-Basith (simple value-protecting transaction), whereby parties agree to a certain amount of foreign currency to be sold and purchased, at a certain exchange rate, at a certain time, either as a once-off or on multiple occasions;
- 'Aqd al-Tahawwuth al-Murakkab (complex value-protecting transaction), whereby parties agree to a certain amount of foreign currency to be sold and purchased, at a certain exchange rate, at a certain time, as a once-off; and
- 'Aqd al-Tahawwuth fi Suq al-Sil'ah (shari'a commodity exchange value-protecting transaction), whereby a shari'a commodity exchange facilitates an Islamic hedging trader to conduct a commodities transaction at the shari'a commodity exchange.
Islamic hedging may only be conducted if there exists an apparent need to minimise an unavoidable risk associated with the exchange rate. It may not be performed for speculative purposes. The fatwa also maintains that an exchange rate must be agreed upon by both parties at the time they reach an agreement.