This Article establishes a Shari'ah ruling for an important contemporary issue that has been the subject of much inquiry: whether Islamic law permits forward currency contracts (that is, hedging against currency risk). Specifically, this Article addresses what happens when a financial institution offers an obligation to sell or buy a specific currency at a specified time in the future at a pre-determined rate of exchange in return for a specified amount, regardless of whether the buyer decides to proceed with the exchange contract. Is it lawful for the client (a trader, manufacturing company, Islamic bank, government, or other transaction participant) to purchase that obligation in order to avoid potential losses resulting from market fluctuations in the prices of currencies? In other words, is it lawful, with respect to the Shari'ah, to hedge against currency risk by purchasing a forward currency contract? This issue is particularly significant given the needs of Islamic financial institutions, trading houses, manufacturers, and even governments and their agencies. But the issue has yet to become the subject of serious academic research or proficient legal scholarship by those qualified to establish a Shari'ah ruling on the matter. Since this Article focuses on the issue of "selling obligations" or "obtaining compensation for obligations," part II of this Article will discuss the meaning of an "obligation" as understood here. Part III will provide context to the definition of "obligation" by considering how Islamic law, orfiqh, characterizes compensation for obligations. After this introductory, but essential, review, this Article will discuss, in part IV, the legal justifications for the conclusion that the obligations described above are consistent with the requirements of Islamic law. Finally, this Article will conclude with a discussion of the practical effect of the approval, from an Islamic law perspective, of the use of options.
"Compensation for an Obligation to Sell Currency in the Future (Hedging),"
Chicago Journal of International Law:
2, Article 9.
Available at: https://chicagounbound.uchicago.edu/cjil/vol7/iss2/9