Research Paper: Commodity and Equity Swaps

Commodity swaps and equity swaps are financial derivatives. In commodity swaps, exchanged cash flows are dependent on the price (floating/market/ spot) of an underlying commodity. A commodity swap allows a customer to secure a maximum
price for a commodity in lieu of a fixed amount.

In return, he/she gets payments based on the market price of the commodity. Fixed-floating and commodity-for-interest are the two types of commodity swaps commonly seen. Equity swaps (and other equity derivatives) provide synthetic exposure to physical equities. In an equity swap, the return on the underlying share is exchanged for a return based on a reference interest rate or yield. Commodity and equity swaps are non-Shariah compliant. These swaps are Riba based transactions. These financial instruments are premised on the exchange of two cash flows of unequal amounts and at staggered intervals which tantamount to Riba al-Fadhl and Riba al-Nasi’ah. There are a number of ways to realise the economic objective of such swaps through Shariah compliant products such as Salam, Wa’d, Murabahah and the double-Wa’d products.
Similarly, an Islamic commodity price swap can be structured to help clients manage their exposure to movements in commodity prices.

The paper can be downloaded from:

Commodity-Swap