Under the firm commitment method. The underwriter buys the securities for less than the offering price and accepts the risk of not selling the issue, while under the best efforts method, the underwriter does not purchase the shares but merely acts as an agent.
The correct option is B, firm commitment; best efforts. A firm commitment is a binding agreement with a third party for which all significant terms are specified. Like, quantity, price, and timing etc.
The firm commitment method generally refers to an underwriter's agreement to assume all inventory risk. In the inventory risk is the probability of an organization being unable to sell its goods or the chance that inventory stock will decrease in value.
A firm commitment also refers to the agreement to purchase all securities for an IPO directly from issuers for public sale.
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