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CA-4.5.15

Shari'a-compliant over-the-counter (OTC) hedging contracts expose an Islamicbank licensee to counterparty credit risk (CCR). CCR refers to the risk that the counterparty to a transaction could default before the final settlement of the transaction's cash flows. An economic loss would occur if the transactions, or portfolio of transactions, with the counterparty had a positive economic value at the time of default. Unlike an Islamic bank licensee's exposure to credit risk through a financing arrangement, where the exposure to credit risk is unilateral and only the Islamic bank licensee financing the transaction faces the risk of loss, CCR involves a bilateral risk of loss; that is, the market value of the transaction can be positive or negative o either counterparty to the transaction, depending on the movements in the market prices of the underlying variables.

January 2015