In Chile, the structure of pension fund portfolio as of the end of 2006 was as follows: domestic Treasury bonds -13%, domestic equities -17%, other domestic debt securities -22%, foreign equities and certificates of participation in investment funds -32%. In Argentina and Peru, the foreign assets accounted for ca. 10% and 14%, respectively, of pension funds assets. The findings of Fisher Black’s studies indicate that the foreign positions should be hedged against exchange rates risk. His famous work shows that the optimal hedge ratio amounts to 77% for investment in equities 10 . Open pension funds could manage their investment portfolios more effectively if they were allowed to invest in derivatives (equities, interest rate instruments and currencies), because – not infrequently – transactions costs on derivatives are much lower than the costs involved in cash market. By way of illustration, the costs in the US cash market are over five times higher than the costs in the market of stock index futures 11 . Additionally, this step could also contribute to the development of the derivatives market in the WSE. It is worth remembering too that as early as in 1974, a well-known study by Bruno Solnik 12 provided an example of American investors to show that the risk of investment portfolio composed of ca. 20 international equities (international dispersion) is twice lower as compared to the portfolio of domestic equities only.

Accordingly, the Central Bank will continue to promote development initiatives through co-ordinating credit delivery activities among the government, financial institutions, foreign donors and beneficiaries. In 2007, the Bank will expand its outreach under existing micro finance programmes, for families in poverty in various parts of the country, with the assistance of lending institutions and other support groups. New and improved poverty focused micro finance programmes will be developed through self-help group mechanisms, while encouraging savings habits and ensuring credit availability for diverse economic opportunities. The Central Bank has also recognised the vital importance of foreign remittances in supplying funds for investment. Thus, the Central Bank will continue to assist both the Bureau of Foreign Employment and the banking sector to attract remittances to Sri Lanka through the formal banking channels. The ambitious awareness campaign embarked by the Central Bank in 2006 will continue with greater interest in 2007, with the aim of raising the level and quantities of remittances significantly. We will also continue in our efforts to support financial markets during the year. The public debt management policy of the Central Bank will be reformulated to develop and strengthen the government securities market, enhance the efficiency in the debt market and access to finance, and maintain a proper balance between commercial borrowings from local and external sources. Towards such objective, the Central Bank will continue in its efforts to strengthen the intermediary participants in the government securities market, and continue with the debt consolidation process while expanding the investor base in government securities. 8.