Law Of One Price

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Exchange Rate

    The price of a nation’s currency in terms of another currency. ...
  2. Gresham's Law

    A monetary principle stating that "bad money drives out good." ...
  3. Arbitrage

    The simultaneous purchase and sale of an asset in order to profit ...
  4. Moore's Law

    An observation made by Intel co-founder Gordon Moore in 1965. ...
  5. Purchasing Power Parity - PPP

    An economic theory that estimates the amount of adjustment needed ...
  6. Big Mac PPP

    A survey done by The Economist that determines what a country's ...
Related Articles
  1. Forex Leverage: A Double-Edged Sword
    Forex Education

    Forex Leverage: A Double-Edged Sword

  2. Trading The Odds With Arbitrage
    Options & Futures

    Trading The Odds With Arbitrage

  3. Put-Call Parity And Arbitrage Opportunity
    Options & Futures

    Put-Call Parity And Arbitrage Opportunity

  4. What is arbitrage?
    Forex

    What is arbitrage?

Hot Definitions
  1. Return On Sales - ROS

    A ratio widely used to evaluate a company's operational efficiency. ROS is also known as a firm's "operating profit margin". ...
  2. Halloween Strategy

    An investment technique in which an investor sells stocks before May 1 and refrains from reinvesting in the stock market ...
  3. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  4. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  5. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  6. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
Trading Center