Islamic Swap-Free Forex Accounts Becoming Fashionable

Most investors prefer transparent pricing

The recent trend in the fast evolving forex industry is the preference of forex traders to opt for Islamic or swap free forex trading accounts, which is certainly the preferred method of trading for practicing Muslims.
Islamic forex accounts are essentially forex trading accounts that do not earn and are not charged interest, a practice forbidden according to the principals of Islam. If all forex traders would open and close their positions during the day, then there would be no issue of charging or receiving interest. However, since many leave their positions open, then the issue of interest differential between the two currencies arises. Most forex companies give interest in the currency where the forex trader has gone long (purchased) and charge interest for the currency in which the forex trader has gone short (sold).

islamic forex account are essensial

Instead of charging and paying interest, most firms rollover the open positions to the next value date, a process called swapping the position through a trade whereby they sell/buy the pair and buy/sell it back immediately for next day value.

So if the forex trader purchased EUR 1 mln and sold the counter value of $1.4 mln on Monday for value Wednesday, the forex firm would sell and buy on behalf of the forex trader and rollover the position to the next value date of Thursday. If there was no interest differential between the euro and the dollar and no difference between the bid and ask interest rates, then the rollover would be done at par, or not cost or gain. But since there is a difference in interest rates, the forex trader stands to receive a tiny profit for holding overnight position of long euros and short dollars, since the interest rates of the euro are higher than those of the dollar.

For Islamic accounts, or swap free accounts, the forex firm would book the profit or loss of the daily swap, allowing practicing Muslims to keep their positions without a benefit or charge. An increasing number of forex traders of other faiths however are also attracted to this type of trading accounts, since they are not burdened with the additional benefit or loss of the interest differential between the currencies they are trading, since many forex traders do not understand how the concept works.

A word of caution though, Islamic accounts usually come embedded with a higher cost and this is something that your forex brokerage firm should clearly explain before signing up swap-free accounts.
There are a number of forex firms which offer swap free accounts by absorbing the cost without an additional charge.

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