Zargis, Ackman contracted a cash-settled total return swap with UBS AG.
Ackman's Pershing Square Fund's FNMA exposure has increased to 11.31% and his FMCC exposure has increased to 11.08%.
For example, it is stated in the FNMA Form SC 13D/A in this way:
A cash-settled total return swap is an OTC derivative arrangement between Pershing Square Funds and UBS AG.
It is a leveraged hedge bet for Ackman. For Ackman to profit, the price must go up. UBS AG profits either way since a commission or rate of interest is automatically paid, plus, if the price goes down, UBS receives additional monies from Ackman (Pershing Square Funds).
Here is how it works.
If the price of the FNMA stock (referenced asset) goes up during the period of the swap which is from March 28 to April 30, 2015, then UBS AG will pay the difference in value between the increased share price and the share purchase price ($3.53). If the price goes to $4.00 then UBS AG will pay $.47 times however many shares are listed for Pershing Square funds. Profit for Pershing Square Funds.
If the price goes down, then Pershing Square must pay to UBS AG the difference between the original purchase price and the lower share price found on April 30, 2015. So, if the price goes down to $3.23 per share on that date, Pershing Square must pay UBS AG,$.30 for every share "purchased" by Pershing Square.
In addition, Pershing Square must pay an interest rate on the value of the notional shares contracted. The rate of interest paid to UBS AG is not revealed.
There are legal questions over beneficial ownership of the common stock during a cash-settled total return swap. And so Ackman reports: