James: The price of credit defaults swaps (CDS) for ABC company is exploding to the upside. Credit default swaps are effectively insurance contracts on the possibility of a company defaulting on its loans. CDS prices have gone up, partly because ABC took out more loans than they can handle. These additional loans increase the risk of default and are passed on to CDS investors in the form of more expensived insurance premiums. Therefore, reducing the quantity of unnecessary loans will be effective in lowering the price of credit default swap contracts.
Alexis: In many cases, the unnecessary loans that you mention are decisions made by upper management on behalf of the company. CEO's will often choose the financing option that maximizes the debt to equity ratio and potential valuation of the company, but may not necessarily benefit the company. As a result, in order to succeed in reducing the price of credit default swaps, we should allow the company's board of direcctors to vote on which form of financing the company should allow and which forms it shoud not allow.
In the table below, identify the assumptions upon which each person's argument depends. Choose one option for each column.