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ChrisCook:

Prepay is a claim issued by a producer of goods and services or by the owner of a productive asset over value supplied or produced over time. An issuer of a prepay credit instrument is obliged to accept that instrument, from any of his customers who holds it, in payment for supply.

But the holder does not have a right to a perpetual flow as with conventional (eg joint stock or freehold) equity; does not have a right to payment of money (which would be a debt instrument) and does not have a right to demand delivery (which would be a forward contract/derivative instrument). He simply has the right to use the instrument in payment for supply, instead of (say) dollars.

There can be no default in respect of a prepay credit instrument because there is no obligation either  to pay money or supply money's worth. The risk for a holder is that the issuer does not produce value against which the instrument may be returned either by him, or by someone else to whom he transfers the instrument.

Like a gift card?

So the Saudis sold gift cards to those wanting to secure the value of their holdings and JPM ran up the price using cheap QE dollars.

Now that QE is ending and JPM can no longer hold up the price. Neither can the Saudis, because they can no longer control market price if they want to honor their gift gards.

Is that it?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sat Jan 3rd, 2015 at 03:58:15 PM EST
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