Week 4 Forum.docx - Week 4 Forum Define the law of one...

This preview shows page 1 - 2 out of 3 pages.

Week 4 Forum Define the law of one price carefully, noting its fundamental assumptions. Why are these assumptions so difficult to apply in the real world in order to apply the theory? SO: P$ * S = P_other a primary principle of competitive markets is that price will equalize across markets if frictions or costs of moving the products or services between markets do not exist. If the two markets are in two different countries, the product's price may be stated in different currency terms, but the price of the product should still be the same. Comparing prices would require only a conversion from one currency to the other If identical products or services can be sold in two different markets, and no restriction exists on the sale or transportation of product between markets, the product's price should be the same in both markets. The law of One price is the economic theory that the price of a given security commodity or is it has the same price when exchange rates are taken into consideration the law of One price is another way of stating the concept of purchasing power parity the law of One price exist due to orbit Raj opportunities. Is the price of a security commodity or acid is different in two different markets then an arbitrageur purchases the assets in the cheaper market and sells it their prices are higher when the purchasing power parity doesn't hold arbitrage profits will persist until the price converges across the market. The law of One price is in the place to prevent investors from taking advantage of price disparity between markets in and situation known as arbitrage. In Efficient market the occurrence of arbitrage opportunities are low most often caused by an event causing a sudden shift occurring in one market before the other markets are affected.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture