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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.

It would seem that a requirement for such a trade would be that the buyer be convinced that the price of the commodity in question can only go up. This provides a cushion for the producer, as the buyers are reluctant to sell their pre-purchased oil at a loss. This is less of a problem for buyers who have an end use for the product, but for those for whom the product is an input to a process it only hedges them against increases in price.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jan 4th, 2015 at 09:27:01 AM EST
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