Tahawwut (hedging)
Hedging; in Islamic finance, risk management transactions built from permissible contracts rather than conventional derivatives.
Tahawwut means hedging: protecting against losses from movements in rates, currencies or prices. In Islamic finance, hedges are built from permissible contracts, such as wa'd, murabaha and spot exchange, rather than conventional swaps and options. ISDA and IIFM jointly publish the Tahawwut Master Agreement as the standard framework for these transactions, and AAOIFI has an accounting standard covering wa'd, khiyar and tahawwut.
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
Wa'd (promise)A unilateral promise to do something in the future; it can be made binding and is used in hedging, sukuk and lease-to-own deals.Islamic profit rate swapAn alternative to an interest rate swap that exchanges fixed and floating profit flows through commodity murabaha trades.Islamic FX forwardA currency hedge built on a binding promise to exchange at an agreed rate on a future date, with the exchange itself done at spot.Islamic cross-currency swapAn alternative to a cross-currency swap that exchanges profit and principal flows in two currencies through commodity trades.MaysirGambling or games of chance, where gain depends on luck rather than productive exchange; prohibited in Islamic finance.