A hedging process/ mechanism that is used or offered by Islamic banks and financial institutions to help mitigate a specific type of risk (khatar or mukhatarah) or more (such as FX risk, market risk, liquidity risk, counterparty risk, etc). Islamic banks’ retail product offerings are generally fixed-rate murabahah-based products to customers (or individual investors), while the corporate customers are offered facilities based on certain floating benchmarks. For example, and from the banks’ perspective, there is a liquidity mismatch between tenors of Islamic deposits and tenors of Islamic investments, and also between fixed rate exposure and floating rate exposure. Corporate clients also require more complex products in order to manage their own risk positions through the banks. Therefore, Islamic banks use Islamic finance tools to manage interest rate risk and FX risk. Among the most common tools are profit rate swaps and the Islamic forward FX contract.

Tahawwut (in Arabic script تحوط) translates as hedging (Islamic hedging) or broadly as risk mitigation.