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← Series 79: Underwriting & New Financing
Series 79 practice questionhardGreen Shoe Option

If an underwriter exercises the Green Shoe option to cover a short position created by overallotting shares, but the stock price has risen above the IPO price, what is the financial impact to the underwriter?

  1. AThe underwriter books a profit equal to the difference between the IPO price and market price for the overallotted shares.
  2. BThe underwriter incurs a loss because it must purchase shares in the open market at a higher price than the IPO price to cover the short position.
  3. CThere is no financial impact as the shares are covered by the issuer at the IPO price.✓ Correct answer
  4. DThe underwriter is required to cancel the overallotment and return the shares to the issuer.
Explanation

Why C — There is no financial impact as the shares are covered by the issuer at the IPO price.

Exercising the greenshoe covers the short with shares purchased from the issuer at the offering price; the underwriter avoids the open-market loss it would incur above the offering price.

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