Hedging against Exchange Rate Fluctuations in Foreign Trade: An Analytical Jurisprudential Perspective

Abstract

The study examines the challenges and risks of foreign trade arising from exchange rate fluctuations and ways to hedge against them. Two key issues emerge: the absence of a common currency between buyer and seller, and the time gap between contracting and settlement, which can cause burdensome currency shifts. Exchange rates are driven by factors such as supply and demand (trade flows, remittances, investment transfers, hedging, speculation), inflation, interest rates, economic and political conditions, and market expectations. The study reviews two main hedging types: self-hedging, undertaken directly by the investor without contracts, and contractual hedging, including murabaha letters of credit, simple murabaha, and currency swaps. Recommendations include developing innovative hedging tools, researching Sharia-compliant alternatives, building academic and institutional partnerships, ensuring compliance with Sharia board rulings, adopting credible and efficient solutions, conducting staff training, and establishing risk management institutions based on takaful in collaboration with Islamic insurers.