19. Hidden Options. Some investment management contracts give the portfolio manager a bonus proportional to the amount by which a portfolio return exceeds a specified threshold. (LO4)

a. In what way is this an implicit call option on the portfolio?

b. Can you think of a way in which such contracts can lead to incentive problems? For exam- ple, what happens to the value of the prospective bonus if the manager invests in high- volatility stocks?