Question : The process of book building is commonly used in:
Option 1: IPOs
Option 2: Secondary market trading
Option 3: Currency exchange
Option 4: Real estate transactions
Correct Answer:
IPOs
Solution : The correct answer is (a) IPOs (Initial Public Offerings).
The process of book building is commonly used in IPOs. Book building is a method used to determine the price at which securities will be offered to investors during an IPO. It involves collecting and analyzing investor demand for the securities being issued. The book building process allows the issuer to gauge investor demand and obtain insights into the appropriate pricing of the securities. The price is typically finalized based on the highest price at which the securities can be sold to meet the demand from investors. This final price is known as the issue price and is used to determine the allocation of shares to investors during the IPO.
Book building is an effective mechanism to establish a market-driven price for the securities being offered, ensuring a fair and efficient allocation process.
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