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

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

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

Upload your study docs or become a

Course Hero member to access this document

Upload your study docs or become a

Course Hero member to access this document

End of preview. Want to read all 3 pages?

Upload your study docs or become a

Course Hero member to access this document

Term
Spring
Professor
N/A
Tags
Economics, 1, 2 degrees, Kota, Lauren Simoneaux

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture