Islamic FX forward based on wacd refers to a unilateral contract involving two parties, where the first party promises with the latter party to buy or sell currency for settlement on a forward value date at the rate and amount agreed today.
If the rate has strengthened further to 3.00, the exporter is protected as he can receive MYR6.1m (USD2.0m * 3.05) instead of MYR 6.0.The adaptation of wacd principle in the first stage of transaction makes the transaction of FX forward comply with shariah since on wacd date, the exchange of currency is not necessarily occur.
According to Syed Alwi, the mechanism of Islamic FX forward is as follows: Corporate customer can unilaterally make a promise (wacD) to purchase a currency, say USD for RM at a future date at a present fixed price.
The illustration on how does wacd provide risk management is shown in the figure 2 below:
Based on the illustration above, it shows that Islamic FX forward transaction using the principle of wacd is able to provide risk management since the exporter is protected against volatility in exchange rate.
However, the drawbacks of wacd are the obligation is only on one party (problem if rate is in bank's favour and it choose not to exercise the wacd) and wacd concept is still not acceptable to all scholars .
The application of wacd can be considered as new in Malaysia, especially in the Islamic hedging products.
In the context of Islamic FX forward, the usage of wacd fails to give protection to both parties since there will be an open exposure, thus it does not give a perfect hedge (Engku Rabiah 2011).
To investigate both the principle of wacd and wacdan based on the above-mentioned maxim, table 3 below will examine the bilateral binding nature in wacd and wacdan in terms of maslahah and mafsadah:
Table 3: Wacd and wacdan in term of maslahah and mafsadah.
The table portrays that the harm consequences of wacd are much more greater than its benefits.
Hence, wacd is adopted in this transaction in order to eliminate the element of riba, so that the currency exchange does not violate baic al-sarf rules.