What are the potential losses that underwriters face in the ECM process?

The potential losses that underwriters face in the ECM process primarily stem from the risk associated with the sale of shares in an initial public offering (IPO) or follow-on offering. When underwriters agree to bring a company's shares to market, they typically commit to buying shares at a set price and then selling them to investors.

If the market conditions change unfavorably or if there is insufficient demand for the shares at the offered price, the underwriters may find themselves unable to sell the intended number of shares, or they may have to sell them at a lower price than anticipated. This situation could lead to substantial financial losses, especially if the underwriters have to hold onto the unsold shares instead of distributing them, as their profitability can be significantly impacted by the price at which they expect to sell these shares.

This answer highlights the inherent risk associated with underwriting, making it the correct choice in understanding the potential losses faced during the ECM process. Understanding this risk is crucial for underwriters as they strategize and manage their commitments in capital markets activities.