Mungai et al.pdf - Prime Journals

899 Prim. J. Bus. Admin. Manage.NSSF and 0.7 billion by non-bank investors (NSE, 2011).Foreign currenciesThe market for foreign exchange involves the purchaseand sale of national currencies (Gans et al., 2009). Aforeign exchange market exists because economiesemploy national currencies. If the world economy used asingle currency there would be no need for foreignexchange markets. Foreign exchange is the world‟slargest and most actively traded market. Each day morethan USD 3 trillion changes hands. This is only possiblebecause of the market‟s professional and efficientorganization. Moreover, the currency market is becomingmore and more transparent, despite its size.Globalization is integrating the global economy, and thereare fewer and fewer pegged exchange rates. The numberof non tradable currencies is also declining, according tothe world Trade Organization report (2011). This meansthat, in addition to traditional currencies, new investmentopportunities are also emerging in growth markets suchas Asia and Latin America. Investing in foreign exchangemeans investing in the economic development of acountry or group of countries. Factors such as GDPdevelopment, trade balances, interest rates, industrialoutput, and the political stability of a country or region allhave a decisive effect on exchange rates. Foreignexchange investments are no longer the preserve oflarge investors. Since the minimum amounts for foreignexchange investments are falling, private investors canincreasingly take advantage of the opportunities offeredby these products. Investment horizons can range from asingle day to several years. As a separate asset class,foreign exchange investments make an ideal portfoliosupplement. They offer investors attractive instrumentswith which to actively manage their portfolios (Heath andTversky, 1991).CommoditiesSince early 2000s, commodity futures have emerged as apopular asset class for many financial institutions.According to United States Department of the Treasury(2010), the total value of various commodity index-relatedinstruments purchased by institutional investors hadincreased from an estimated $15 billion in 2003 to atleast $200 billion in mid-2008. Various observers, policymakers and the US Department of Treasury expressed astrong concern that index investment as A form offinancial speculation might have caused unwarrantedincreases in the cost of energy and food and inducedexcessive price volatility. What is the economic impact ofthe rapid growth of commodity index investment? Toaddress this question, it is important to recognize theconcurrent economic transition of commodities marketsprecipitated by the rapid growth of commodity indexinvestment. Prior to early 2000s, despite liquid futurescontracts traded on many commodities, their pricesprovided risk premium for idiosyncratic commodity pricerisk and had little movements with stocks and with eachother (Fellner and Maciejovsk, 2007). These aspects arein sharp contrast to price dynamics of typical financialassets, which carry premium only for systematic risk andare highly correlated with market indices and with eachother. This contrast indicates that commodities marketswere partially segmented from outside financial marketsand from each other. Recognition of potentialdiversification benefits from investing in the segmentedcommodities markets prompted the rapid growth ofcommodity index investment after early 2000s andprecipitated a fundamental process of financializationamongst commodities markets.Individual savings accountAn Individual Savings Account (ISA) is designed for thepurpose of investment and savings with a favourable taxstatus. Money is contributed from after tax income andnot subjected to income tax or capital gains tax within aholding or upon withdrawal. Cash and a broad range ofinvestments can be held and there is no restriction onwhen or how much money can be withdrawn. Fundscannot be used as security for a loan. It is not a pensionproduct but can be a useful complement to a pension forretirement income, particularly when it is desirable todraw down capital at a faster rate than permitted in apension (Dash, 2010).Endowment policyAn endowment policy is a life insurance contractdesigned to pay a lump sum after a specified term (on its'maturity') or on death. Typical maturities are ten, fifteenor twenty years up to a certain age limit. Some policiesalso pay out in the case of critical illness. Policies aretypically traditional with-profits or unit-linked (includingthose with unitised with-profits funds). Endowments canbe cashed in early (or surrendered) and the holder thenreceives the surrender value which is determined by theinsurance company depending on how long the policyhas been running and how much has been paid in to it(Allen and Faulhaber, 1989).Most endowment policies are established for a setperiod (the policy term) of 10 years or more, this isbecause advantageous taxation rules apply to LifeAssurance policies with terms of 10 years or more. Thesetaxation rules (called the Qualifying rules) allow for anyinvestment gains made within suitable policies, calledQualifying policies, to be paid to the policyholder withoutany personal tax being deducted. As endowment policiesare Life Assurance policies then a term for the policymust be established at outset. Although it is possible forpolicies to have terms of less than 10 years, this is quiterare.Where the policy premiums are invested will differ inaccordance with the policy type. The majority of suchpolicies are 'With Profits'. In these instances the policypremiums are invested in the With Profits fund of the Life