This paper discusses the concept and operations of the swap instrument as a hedging mechanism in the Islamic financial system. The main objective of this paper is to give a clearer picture of the swap mechanism as offered by the international Islamic financial institutions and how its operations are structured in accordance with Shari'ah principles and contracts. The paper also outlines the Shari'ah parameters that need to be observed by the financial institutions offering the various swap instruments. In preparing this paper, ISRA has held a series of internal discussions as well as with outside parties, including Shari'ah experts and operating officers from international banks directly involved in the structuring of Shari'ah-compliant swap products. Documents related to the products and related academic materials were also referred to, giving a wider and thorough perspective on the issue.
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