• Foreign Exchange

Foreign Currency Exchange (or FX) involves the conversion of one currency into another currency at an agreed market FX rate. Most companies are exposed to the day-to-day volatility of the FX rate (i.e. the FX risk). This volatility directly and indirectly affects the cash flow, revenue, expenses, and overall financial statement of companies.

Every company strives to manage the impact of all risks, including FX risk. Identifying and managing the impact of FX volatility can only add value to the company. CIMB Islamic has the expertise and a range of FX-risk management solutions to assist you in addressing your requirements toward managing your FX risk.

There are different approaches that companies typically take to address their FX risks. Some of these include:

  1. Do nothing
  2. Open a Foreign Currency Account-i (FCA-i)
  3. Cover (or hedge) your FX risk

DO NOTHING:
Only convert your foreign currency on the day of requirement, or within a day or two days of requirement. Unless your benchmark is the prevailing spot rate (see SPOT FX contract below), you will be exposed to daily FX volatility, which means you can be exposed to extreme movements in FX rates.

OPEN A FOREIGN CURRENCY ACCOUNT-i (FCA-i)
To debit or credit a foreign currency account without converting to local currency as and when payments are due or receipts are receivable. This method is useful when your net exposure is negligible.

COVER (OR HEDGE) YOUR FX RISK
Typically a Forward FX contract is used to hedge your FX exposure. Types of Forward FX contract used include an Outright Forward FX contract, an FX Option (or a Customised FX Forward) contract, and other derivatives. All FX contracts are agreements (obligations by both parties) to exchange a specified amount of one currency for another currency, as determined by the Forward FX rate/s for settlement on a pre-determined future (or forward) date, according to the terms of each contract.

Value Today

 

FX transaction under Bai' al-Sarf, arrangement for settlement of foreign currency on the same day.

 

Foreign Exchange Forward Limited Option

 

FX transaction under Bai' al-Sarf & Wa'ad, arrangement for multiple utilisation within a specific future period.

Value Tomorrow and Spot

FX transaction under Bai' al-Sarf, done today for settlement of foreign currency on next business day or next two days.

Islamic Foreign Exchange Option Equivalent

FX transaction under Bai' al-Sarf, Wa'ad & Commodity Murabahah/Bai' al-Innah that gives you a right, but not obligation to do currency exchange at a predetermined strike price on a specific future date. A premium equivalent payment is payable up-front.        

Fixed Forward

 

FX transaction under Bai' al-Sarf & Wa'ad, arrangement for settlement of foreign currency at a future date beyond 2 business days/maximum 365 days.

Long Term Foreign Exchange

FX transaction under Bai' al-Sarf & Wa'ad, arrangement for settlement of foreign currency at a future date beyond 1 year/maximum15 years.

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