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An active investor who is purely speculating (ie putting capital at risk in search of transaction profit) would buy prepay credits if he had an expectation that the price will go up, so he could then sell the prepay credit at a profit. But of course he also risks a loss if the price goes down.

A passive investor on the other hand would buy the credit because he wishes to maintain the value of his capital by reference to the dollar. His motivation is to avoid loss and to hedge inflation.

A refiner of crude oil, like the passive investor, is also motivated not by expectation of profit but by fear of loss. He essentially wishes to insure himself against a rise in the dollar price of his raw material, and may buy prepay oil credits in order to do so.

Note that one of interesting aspects of prepay for an investor, whether motivated by fear or greed, is that of liquidity.  

The beauty of prepay is that whether or not financial buyers are in the market, physical buyers like refiners will always buy prepay credits at the best (or even any) price below the physical market price in payment for spot supply.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Jan 4th, 2015 at 01:27:07 PM EST
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