An Islamic finance treasury arrangement that an Islamic bank and a counterparty enter into for the purpose of foreign exchange risk management. The counterparty purchases a commodity on the basis of credit murabaha using its local currency and then sells the commodity on a murabaha basis, but with the price being paid in either its local currency or some other currency of choice.
This structure replicates that of a conventional currency option in a shari’a-compliant manner (since payments of the two legs of the transaction are denominated in different currencies and are pre-agreed at the contract session or majlis al-aqd).
The Islamic currency option is known in Arabic as khayar al-naqd al-islami.
