Law Of One Price

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DEFINITION of 'Law Of One Price'

The theory that the price of a given security, commodity or asset will have 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.

BREAKING DOWN 'Law Of One Price'

The law of one price exists due to arbitrage opportunities. If the price of a security, commodity or asset is different in two different markets, then an arbitrageur will purchase the asset in the cheaper market and sell it where prices are higher.

When the purchasing power parity doesn't hold, arbitrage profits will persist until the price converges across markets.

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RELATED FAQS
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    Macroeconomic analysis relies on several different metrics to compare economic productivity and standards of living between ... Read Full Answer >>
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    Arbitrage is basically buying in one market and simultaneously selling in another, profiting from a temporary difference. ... Read Full Answer >>
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    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
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    In statistics, regression analysis is a widely used technique to uncover relationships among variables and determine whether ... Read Full Answer >>
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