A comparative study between foreign exchange forward contracts and islamic foreign exchange forward contracts

This paper presents an analysis of foreign exchange forward hedging and risk management applied in both conventional and Islamic financial markets. This paper compare the hedging mechanism and Islamic law perspective for both instruments based on data from different documents, books and websites to recognize distinguishing aspects of these two hedging instruments and the related risk protection. This study show that hedging and risk management mechanism and goals in these two foreign exchange forward instruments are actually not similar, foreign exchange forward is based on binding promise while the Islamic foreign exchange forward is based on the concept of dual non-binding and independent promise to avoid the Islamic law criticisms of conventional FX forward. However both instruments are slightly similar in their respective business activities and its risk protection efficiency in foreign exchange markets and international trade.