Analysis of Iranian Currency versus Dollar

INTRODUCTION The Iranian currency (Rial) follows the exchange rate on a daily basis. In this work the Iranian currency has been studied. In particular, the exchange rate for one Dollar in terms of Rial that is 1/10 of one Toomaan from January 1962 through January 2011 has been studied. Theoretical frameworks for currency, exchange rate, and currency option pricing have been developed by several researchers. Two of the main theories are as follows: 1. Purchasing power parity (PPP) that quantifies the relation between inflation exchange rates between two countries that are being studied. There are two types of PPP theories. The absolute form of PPP states that given the fact that there are no international trade barriers, then consumers will tend to shift their purchases to the country that offers lower prices (as measured by common currency). As a result the exchange rate will adjust so that the same items will cost the same in both countries as measured by the same common currency. On the other hand, the relative form of PPP is the exchange rate that is adjusted based on the relative inflation in the respective countries (Haque & Saba, 2011). 2. The second theory of exchange rate determination is the interest rate parity theory (IRO). In this theory the major assumption is that one should not make a greater profit by taking advantage of an interest rate differential in these two countries since the currency for the country with the higher interest rate has a tendency to depreciate either in the forward market or appreciate in the spot market (Haque & Saba, 2011). Furthermore, the interest rate parity satisfies the following equation: 1 + [d.sub.i] = 1 + [F.sub.i](forward rate/spot rate) where [d.sub.i] = domestic rate and [F.sub.i] = foreign rate. This exchange rate must be a direct quote, that is, it must be Rial (one Toomaan = 10 Rials) per Dollar. It must be foreign currency per unit of domestic currency. Here the United States is considered as domestic and Iran is considered as foreign. Black and Scholes (1973) provided a relationship between stock price and the value of an option under the following assumptions: a) The short-term interest rate is known and is constant through time. b) The stock price follows a random walk in continuous time with a variance rate proportional to the square of the stock price. Thus the distribution of possible stock prices at the end of any finite interval is log- normal. The variance rate of the return on the stock is constant. c) The stock pays no dividends or other distributions. d) The option is European, that is, it can only be exercised at maturity. e) There are no transaction costs in buying or selling the stock or the option. f) It is possible to borrow any fraction of the price of a security to buy it or to hold it, at the short-term interest rate. g) There are no penalties to short selling. A seller who does not own a security will simply accept the price of the security from a buyer and will agree to settle with the buyer on some future date by paying him an amount equal to the price of the security on that date. At the present time, due to international sanctions, Iranian currency does not participate in currency option pricing and for that reason relevant discussions will be omitted. There are several factors that are not quantifiable, but they influence the exchange rate that Haque and Saba (2011) mentioned: Internal Political Condition Such as policy decisions, in particular when these decisions are unpredictable. As well as elections, especially when there is no clear prediction for outcome of an election for major candidates with very opposite policies and point of views. External Political Condition External Political Condition and instability due to uprising or revolution or other conditions such as the events that occurred in Middle East and other oil countries during the first quarter of 2011 made a major effect on the price of gold and as the result exchange rate was affected. …