Series 79 practice questionmediumGreen Shoe Option
What is a 'reverse green shoe' option?
- AAn option that allows the underwriter to return shares to the issuer if the stock drops
- BAn option that allows the underwriter to sell additional shares back to the issuer at the offering price, typically used in follow-on offerings to support the stock price when it trades above the offering price✓ Correct answer
- CAn option that cancels the original green shoe provision
- DAn option that converts common shares to preferred shares
Explanation
Why B — An option that allows the underwriter to sell additional shares back to the issuer at the offering price, typically used in follow-on offerings to support the stock price when it trades above the offering price
A reverse green shoe (also called a greenshoe put) gives the underwriter the option to sell shares back to the issuer at the offering price. This is used primarily when the stock trades above the offering price and the underwriter has a net long position from stabilization activities. The reverse green shoe allows the underwriter to dispose of these shares at the offering price rather than selling them in the market and potentially depressing the price. This mechanism is less common than the standard green shoe but provides additional flexibility for aftermarket stabilization.
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