Series 79 practice questioneasyGreen Shoe Option
Which of the following best describes how an underwriter uses the green shoe (overallotment) option in an equity offering?
- ATo purchase shares from the issuer at a premium to the offering price
- BTo cover short positions created by overallotments in the offering✓ Correct answer
- CTo lock up insider shares for 180 days
- DTo reduce the underwriting discount paid by the issuer
Explanation
Why B — To cover short positions created by overallotments in the offering
The green shoe allows underwriters to purchase additional shares at the offering price to cover overallotments. The trap is confusing the option’s purpose with pricing, lock-ups, or discounts.
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