2011 Examination Question (7). Are there conflicts in foreign exchange transactions between market practices and the Shari’ah principles? Are there viable Islamic alternatives to currency forwards?. 2011 Exam Q&A (7a). Islamic stance on Riba , Gharar , Maysir and short selling.
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(a) currency exchange ** (Yes)
(b) currency arbitrage ** (Yes)
(c) interest arbitrage ** (No)
(d) currency forwards**(IFI)
(e) currency options**(IFI)
(f) currency futures** (IFI)
(g) currency swaps** (Conditional)
(g) risk-shifting (invoicing)** (Conditional)
(i) exposure netting** (Yes)
BOP becomes an issue if:
BOP is not an issue when:
* Note: American option can be exercised at any time up to the expiration date, whereas the European option can be exercised only at maturity.
FACTORS DETERMINING DEBT-EQUITY MIX:
Three categories of fund sources :
* Funds from Parent
* Internal funds of the foreign Subsidiary
* Debt raised in the foreign country of investment
1. Cost of funds from Parent (Kep): Parent’s cost of equity at home (Ke) adjusted for increased risk abroad, and taking into account Parent’s debt-equity ratio and cost of debt (Kd)
2. Cost of internal funds of Subs (Ks): Kep, with allowances for withholding tax
3. Cost of new foreign debt (Kndf): IR with adjustments for expected devaluation (i.e. inflation) and corporate tax
All 3 components will then be weighted (weights based on respective fund size) to arrive at the discounting factor
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