Series 79 practice questionmediumGreen Shoe Option
A syndicate overallots shares during an IPO and exercises the green shoe option. What is the primary reason the syndicate does this?
- ATo cover short positions created by overallotment✓ Correct answer
- BTo increase the issuer’s proceeds
- CTo reduce the underwriter’s spread
- DTo avoid lock-up expiration
Explanation
Why A — To cover short positions created by overallotment
The green shoe option allows underwriters to cover short positions created by overallotment, stabilizing the price. Increasing issuer proceeds is a secondary effect, and the green shoe is unrelated to lock-up or the underwriter’s spread.
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