The market for sharia-compliant foreign exchange hedges continues to grow, with Citigroup structuring the first cross-border sharia-compliant cross-currency profit rate swap worth $230 million.The bank joins an increasing number of institutions including Deutsche Bank, HSBC and Standard Chartered to offer sharia-compliant forex hedges.The five-year swap was entered with Dubai Financial, a direct investment vehicle of Dubai Investment Group, on October 18. Dubai Financial is using the structure to hedge forex translation risk arising from the group’s equity investment in Bank Islam.The swap uses commodity murabahah transactions as the underlying contract. A murabahah transaction is a contract between a bank and its client for the sale of goods at a pre-agreed price that includes a profit margin. For the transaction to be sharia-compliant, the sale has to occur in separate stages. First, the bank acquires a commodity with the intention to sell it to the client. Then the client buys the goods acquired by the bank at a marked-up price.In this deal, Citigroup and Dubai Financial are agreeing to undertake a series of commodities trades in different currencies. The effect of the hedge would be to insulate the group from variations in forex rates."The currency hedge will help protect the financial performance of our group from fluctuations in the foreign exchange rate and allow us to focus on partnering with Bank Islam to continue to lead the way in Islamic banking. The fact that this product is approved in Malaysia and the Middle East is an endorsement of the applicability of this product in the Middle East," said Dubai Financial.
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