Explanation

Structural form models (also known as firm-value models) of corporate credit risk:

• Option B is correct: Structural models can explain the economic reason for default. These models view equity as a call option on the firm's assets and default occurs when the firm's asset value falls below its debt obligations.

• Option A is incorrect: Structural models treat default as an endogenous variable, not exogenous. Default is determined by the relationship between the firm's asset value and its debt level.

• Option C is incorrect: Structural models do require an estimate of the company's asset volatility to implement. In fact, volatility is a key input in these models.

Key characteristics of structural models:

• Based on Merton's option pricing framework
• Default occurs when firm value falls below debt value
• Can explain why default happens (economic fundamentals)
• Require estimates of firm value and volatility
• Provide economic intuition for credit risk