Canadian Securities Course (CSC) Practice Exam

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What does the "Greenshoe option" provide for underwriters in an IPO?

  1. The ability to issue more of the underlying firm's stock

  2. The right to reject the firm's stock

  3. The opportunity to buy back the firm's stock

  4. The option to sell the firm's stock at a higher price

The correct answer is: The ability to issue more of the underlying firm's stock

The "Greenshoe option" allows underwriters in an IPO to issue more of the underlying firm's stock. This is usually done in response to high demand for the stock, providing the underwriters with the flexibility to meet that demand and potentially increase their profits. Option B, the right to reject the firm's stock, is incorrect as the underwriters are responsible for selling the stock and have a vested interest in its success. Option C, the opportunity to buy back the firm's stock, is incorrect as the option is for issuing more stock, not buying it back. Option D, the option to sell the firm's stock at a higher price, is incorrect as this is the general purpose of an IPO and not specific to the "Greenshoe option."

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