SoftBank Group Corp (9984.T) is set to post a gain of $34.1 billion by reducing its stake in Alibaba Group Holding. But the Japanese conglomerate will not sell its shares directly in the market. It is using a complex security called "prepaid forward contracts"

Prepaid forward contracts are widely used by investors who want to monetize positions. The contract involves a floor and a cap price, limiting investors' exposure to that price range. To settle the contracts, investors can either pay financial institutions in cash or hand the physical shares.

Financial institutions use the floor price of the range and apply a discount rate. Prepaid forward contracts also offer some fiscal advantages, as investors only have to pay taxes on capital gains when the contract is settled. To advance the money, financial institutions use a floor price.

SoftBank decided to hand 242 million shares in Alibaba to financial institutions. The Japanese conglomerate stands to gain $34 billion from unrealized gains. SoftBank also said the physical settlement would eliminate concerns about future cash outflows, reduce costs related to those contracts, and shore up its defenses against the market downturn.
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