Series 79 practice questionhardGreen Shoe Option
An IPO syndicate covers its short position by exercising the Green Shoe after shares rise above the offering price. Which is a potential risk if the syndicate fails to cover its short position promptly?
- AThe issuer must buy back the shares at market prices
- BSyndicate earns a guaranteed profit on all short sales
- CStabilization is no longer permitted under Regulation M
- DSyndicate is exposed to unlimited loss if the share price continues to rise✓ Correct answer
Explanation
Why D — Syndicate is exposed to unlimited loss if the share price continues to rise
If the syndicate does not exercise the Green Shoe and the share price rises, covering the short position could result in unlimited losses above the offering price. The trap is believing profits are guaranteed or that the issuer is obligated to buy back shares.
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