In fact this first paper from Allen & Overy goes into some detail on the individual legs of the swap (the individual Murabahas/rolling murabahas).The idea is simple enough:
- For the floating leg, we are allowed Murabahas with markups linked to LIBOR. We can enter into consecutive Murabahas on a rolling basis, with Wa'd to enter into Murabaha at the market price + market determined LIBOR to make for rolling Murabahas.
- For the exotic leg, some scholars would allow the linkage of the Profit Rate of the Murabaha to be almost anything so long as it is determined as of the time of entering into the Murabaha. So range accruals (i.e., the profit rate is LIBOR + X accruing times the number of days LIBOR is in between LowerBound and UpperBound) and almost any exotic payoff can be used as a markup so long as it is set at the time the Murabaha is entered into.
Allen & Overy's paper on Profit Rate Swaps
NOTES:
- This not a typical exotic swap and in this case the exotic leg has a delayed payment. The typical structure for a range accrual is to pay periodically (say every 3M) LIBOR(t)+X% times the number of days LIBOR(t) is between LowerBound and UpperBound, for t between 0 and 3M, with payment made at t=3M. In the PRS version, t=3M is the first date that the coupon (oops, profit markup) is known with complete certainty and is then the date at which the Murabaha is entered into with payment of this markup at t=6M. This delay is nonstandard in the exotic world but is really only a small matter for traders/structurers/clients.
- Sh Yusuf DeLorenzo's bjections to DB's "Shariah Conversion Technology" (link here) apply equally well to this structure. Can we asset swap Pork Bellies for LIBOR using Murabahas and make it all seem Shariah Compliant?
- Nathalie Schoon, Islamic Banking & Finance, (section on Murabaha + Wa'ad PRS)
- Allen & Overy on Cross Currency Swaps
- Azmi Law on Islamic Swaps in Malaysia
- Derivatives Week, article on Islamic CDS (short on details)
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