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ptions on financial futures are relatively new financial instruments, although 0 options on commodities have been in existence since the Nineteenth Century.The historical record of commodity options has been beset with problems, abuses and suspended operations.The prospects for commodity options remained bleak until 1981, when the Commodity Futures Trading Commission (CFTC) allowed options to be traded on organized exchanges for an initial three year period.' In view of the blemished record of commodity options trading and public policy considerations, the purpose of this pilot program was to provide a means by which the commercial usefulness of options and the impact of options on associated markets could be evaluated.Among the options granted approval under this pilot program, the market for options on Treasury bond futures has grown into the biggest market on any of the nation's 11 commodity exchanges. The growth of this market is perhaps best exemplified by a recent excerpt from the financial press (Wall Street Journal, 30 April However, the growth of these markets has also spawned questions concerning the impact of options trading on other segments of the capital markets, such as the effect of trading in such instruments on the capital formation process, the liquidity of credit and money markets and the effect on the market for the underlying assets. The purpose of this research is to investigate one facet of the gamut of issues facing the commodity options market; namely the behavior and volatility of Treasury Bond futures around the time of expiration of call options on these futures. 'See Johnson (1982a) for a chronology of the historical developments in commodity option trading. Trading in options on nonfarm futures contracts and on nonfarm physical commodities such as gold and silver was extended indefinitely by the CFTC on August 13, 1985. A similar three year pilot program for agricultural options will expire on January 25, 1987.

utures markets arose from the need to reduce price risk. The economic functions F of futures markets are to provide an arena for competitive market price discovery, a hedging vehicle for producers and processors of actual commodities, and a means for improving the efficiency of the market.However, futures markets also encourage speculation, although the existence of futures markets is not a necessary and sufficient condition for speculative activity. Despite the negative connotation sometimes associated with the word, profitable speculation is considered by some economists (Friedman, 1953) as a catalyst for price stabilization. Since the futures markets are characterized by a high degree of informational efficiency, the effects of such stabilization wili permeate to the cash markets. However, the opposite viewpoint (Kaldor, 1939 andBaumol, 1957) alleges that speculators promote price destabilization which spills over into the cash markets and induces price volatility in the cash markets. This view contends that futures market volatility is the change agent causing the volatility in the cash market of a particular security.' A practical implication of this hypothesis is that if futures market volatility causes cash market volatility, then the latter variable can be considered as a leading indicator of forthcoming changes in the cash market and *The authors would like to thank the editor of Journal ofFuiures Markets, Dr. Mark Powers, and two anonymous 'Figlewski (1981) has also mentioned the possibility of reverse causation with the change agent in futures price volatility being the cash price volatility in situations where unstable prices in the cash market evoke an increased volume of hedging in the futures market.reviewers for helpful comments and suggestions.

inancial markets are termed as efficient if security prices fully and instanta-F neously reflect all available information. Fama (1970) has characterized markets as weak-form, semi-strong and strong form efficient relative to the different types of information available for efficiency assessment. While the different concepts of market efficiency have been studied at length using a variety of techniques and data for the equity markets (Wood, McInish, and Ord, 1985) and derivative security markets, such as options (Ball and Torous, 1985) and convertibles (Alexander and Stover, 1977), most tests of market efficiency in the futures markets have been of the weak-form type (Helms and Martell, 1985).' It is only recently that researchers have started studying the semi-strong efficiency characteristics of the futures markets. The concept of semi-strong efficiency states that security prices adjust rapidly to all publicly available information. This information set includes information ranging in diversity from investment advisory data to regulatory changes to unexpected world events.Recent research on semi-strong efficiency in the futures market includes testing the efficacy of forecasting systems which incorporate currently available information Hartmann, 1979, 1980), the reaction of grain futures prices to *The author would like to thank the editor of Journal of Futures Markets, Dr. Mark Powers for help and encouragement, two anonymous reviewers for invaluable comment8 which greatly improved the quality of the article and John Lilley of Money Market Services, Inc. for providing the survey data used in the study. An earlier version of the article was presented at the 1986 Mid-West Finance Association Meeting. All e m m , however, are the sole responsibility of the author.' Chance (1984, 1985) for an excellent summary on empirical studies of futures market efficiency.

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