Series 79 practice questionhardGreen Shoe Option
If an underwriter has not exercised the Green Shoe option and the stock price falls below the offering price post-IPO, what action can the underwriter take to stabilize the price?
- AExercise the Green Shoe to purchase shares from the issuer at the IPO price
- BSell additional shares short into the market
- CBuy shares in the open market to cover overallotments and support the price✓ Correct answer
- DCancel the offering and return funds to investors
Explanation
Why C — Buy shares in the open market to cover overallotments and support the price
The underwriter may buy in the open market to cover its short position, thus supporting the price. The trap is assuming the Green Shoe can be used to purchase shares from the issuer after the fact when prices fall.
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