The law of one price is a concept in financing that is very important when trying to arbitrage. This law states that no matter the exchange rate of a country, the price of a service, asset or commodity will remain the same regardless of any changes. This ties into the purchasing power parity as well because if this is the case then there will be no opportunity for arbitrage. So if the price becomes different in different markets then arbitrageurs have the ultimate opportunity to buy currency in one market for cheap and sell it in another market for more. The law of one price will always stop arbitrage opportunities from taking place because the price will remain the same. Arbitrageurs will always disagree with the law of one price because it makes their job non-existent.

One can also talk about the aspect of a certain good being the same price in the same market. This is also an aspect of the law of one price. This makes it fair for all consumers or traders. They will purchase the commodity as one price and sell it for the same price. In financial markets, this helps minimize arbitrage opportunities. But because the financial market id full of arbitrage opportunities it seems as thought the law of one price doesn’t succeed very much. Then one raises the question of why it still exists in finance? The answer to this question is simple. Laws are meant to be broken. In this case, the purchasing power parity will continue to be a strong concept in finance and with price fluctuations always and continually changes, the law of one price is meant to be disobeyed. With the economy in the state that it is today it is hard for consumers not to create arbitrage opportunities. It is the way of the financial trading world.

Sources:

www.economist.com, www.yale.edu