Question

Discuss the meaning of the Law of One Price

Answer 1

Law of one price states that a given security must have the same price. It is that the price of a given security has the same price when exchange rates are taken into consideration. The law of one price exists due to arbitrage oppurtunities. If a security is selling at two different prices in different markets, an arbitraguer will buy the security from teh cheaper market and sell the same security to the market where the price is high. . When the purchasing power parity doesn't hold, arbitrage profits exists untill the prices converge. The law of one price is in place to prevent investors from taking advantage of a price disparity between markets in a situation known as arbitrage.
In an efficient markets, arbitrage oppurtunities are low.