Islamic profit rate swap
An alternative to an interest rate swap that exchanges fixed and floating profit flows through commodity murabaha trades.
An Islamic profit rate swap lets two parties exchange a fixed profit flow for a floating one, or the reverse, without an interest rate swap. It is usually built from a series of commodity murabaha trades, some priced at a fixed rate and others at a floating rate reset each period. ISDA and IIFM publish standard documentation for it under the name mubadalatul arbaah, in single-sale and two-sale versions.
Sources
This entry explains a term; it is not a Shariah ruling. Approving a product is for each institution's own Shariah board and regulator.
Related terms
Tahawwut (hedging)Hedging; in Islamic finance, risk management transactions built from permissible contracts rather than conventional derivatives.Commodity murabahaInterbank and treasury deals in which commodities are bought and sold on deferred payment to place or raise short-term funds.Rate of return riskThe risk that changes in market rates affect an Islamic bank's net income; the analogue of interest rate risk in the banking book.Islamic cross-currency swapAn alternative to a cross-currency swap that exchanges profit and principal flows in two currencies through commodity trades.