Why does the solution here state that the structural model uses market information and option pricing theory and doesn't look at underlying business? I thought that's what the reduced form model does?
I would say that both these models could be described in this way. The structural model looks at the price volatility of the equity shares and implies an "option like" risk from that, allowing it to price the debt. At no point has anyone done fundamental analysis on the business or the prospects for the company in order to price the debt. So the statement seems OK for the structural model. The reduced form model does the same in a different way, modelling the ratings transitions etc, but at no point trying to fundamentally assess the prospects for the company and its survival.
