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Greg Brown, a junior credit analyst with Malachite Managers, is preparing a presentation on structural and reduced form models. When discussing the content with a

Greg Brown, a junior credit analyst with Malachite Managers, is preparing a presentation on structural and reduced form models. When discussing the content with a colleague, Brown makes the following statements:

Statement 1:

Under a structural model, the value of debt can be viewed as equivalent to a long position in a call option on the assets of the issuing firm.

Statement 2:

An advantage of reduced-form models is that the probability of default can be modeled as a function of observable company-specific and macroeconomic variables.

Brown is most accurate with respect to:

A)statement 1 only.

B)neither statement 1 nor statement 2.

C)statement 2 only.

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