Series 79 practice questioneasyGreen Shoe Option
What is the primary purpose of the green shoe (overallotment) option in an underwriting agreement?
- ATo guarantee the issuer receives the maximum offering price
- BTo allow insiders to sell additional shares if demand is strong
- CTo give underwriters flexibility to cover short positions by purchasing extra shares from the issuer✓ Correct answer
- DTo allow the company to delay its offering if market conditions are unfavorable
Explanation
Why C — To give underwriters flexibility to cover short positions by purchasing extra shares from the issuer
The green shoe option enables underwriters to cover over-allotments by buying additional shares from the issuer, supporting price stabilization. It does not guarantee price or allow for offer delays.
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