^{Financial Markets Solutions} Profit Rate Swap

FRTs are based on Designated Future Transaction (DFT) in which one party pays a fixed profit rate and receives a floating profit rate equal to a reference rate (the underlying rate). FRA is a useful tool to swap working capital facilities and short-term liabilities.

A vanilla PRS is a product that is used to hedge long-term finances against rising market rates. The mechanics of the product are such that the client pays a fixed rate and receives the relevant floating rate equal to the reference rate (the underlying rate). Irrespective of the market rate, the client will continue to pay a fixed rate for the entire life of the trade. A vanilla PRS is a useful tool for long-term liabilities, where the profit rate is fixed and there is certainty on the cash flow for the tenor of the finance.

A Cap is an option that provides protection to the client from rising market rates, while still allowing the customer to benefit if rates fall. If the relevant reference rate rises above the cap strike, the client receives the difference between the profit rate fixing and the strike. A floor is a product that enables clients to floor their profit rate receivables. ADCB Islamic Banking pays the client the difference between the profit rate fixing and the floor strike if rates fix below the strike. The arrangement is based on a Shari’ah compliant unilateral promise (waad) mechanism.

A KO swap is a structure that knocks out periodically if the relevant market rates fix rises above a predefined barrier. The client is hedged against rising rates up till the KO rate, as they pay a fixed rate and receive floating. As the swap has the KO feature, the client pays a lower fixed rate than the vanilla PRS swap. This product is useful for a client who wants to fix the profit rate but has a view that the underlying profit rate will not go above the knock out rate. The arrangement is based on a Shari’ah compliant unilateral promise (waad) mechanism.

A Callable Swap is a profit rate swap that can be called by ADCB Islamic Banking at certain predefined dates during the life of the trade. The client is hedged against rising rates as they pay a fixed rate and receive floating. As the bank has the right to call the swap at predefined dates, the client pays a lower fixed rate than the vanilla PRS. The arrangement is based on a Shari’ah compliant unilateral promise (waad) mechanism.

This is a profit rate derivative structure in which the client receives the price differential based on the agreed upon range or value of an index. The client undertakes to enter into a fixed or floating rate exchange transaction.

This is a variation to the vanilla profit rate swap, which gives either the client or the bank the right to extend the swap at the maturity of the trade. If the client has the right to extend the swap, the fixed rate that they pay is slightly higher than the vanilla swap rate. If the bank has the right to extend the swap, the fixed rate that the client pays is slightly lower than the vanilla swap rate. The arrangement is based on a Shari’ah compliant unilateral promise (waad) mechanism.

A CCS enables clients to swap strips of cash flows from one currency into another at future dates in order to match cash flows from/to underlying assets and liabilities. Both legs of the swap could be either fixed or floating. The FX rate on the initial, interim and final amounts is fixed in advance. The swap may or may not have an initial and final exchange, and this may impact the rate of the CCS. The arrangement is based on a Shari’ah compliant unilateral promise (waad) mechanism.