When looking at doing business internationally the company must take into consideration the idea of exchange rates and the affect those will have on the business. The Law of One Price is a theory that comes into play when looking at international business trade. The Law of One Price says that the given price of an asset, commodity, or security will be the same with or without the exchange rates taken into consideration.

The reason that this theory can even exist is due to the arbitrage opportunities that occur. If the asset or commodity were cheaper in one market versus another the buyer would just go to the cheaper market and then turn right around and sell the asset in the higher market. The Law of One Price is also referred to as the Purchasing Power Parity and basically means the same thing. The exchange rates between two countries need to keep the asset price the same or foreign trade will suffer. This means that if one country is experiencing a time of inflation than they need to devalue their currency to comply with the Law of One Price.

The Law of One Price however only occurs when a few qualifications are met in the two countries that are involved in the exchange. First of all there must be a competitive market for the product in both of the countries and the goods must be able to be traded between the countries. Also the other expenses involved in a trade must be discussed and figured out before to avoid any deterrents to the trade. Many trades never go through due to the fact that the terms of transportation costs and other costs never are discussed until to late into the deal. Once these criteria are meet than the Law of One Price has the best chance of happening in the exchange for the commodity, asset, or security.

Sources:

"Law of One Price" Investopedia. Web. 9 Dec. 2009.

http://www.investopedia.com/terms/l/law-one-price.asp

"Purchasing Power Parity Theory of Exchange Rate." Economy Watch n. pag. Web. 9 Dec 2009. <http://www.economywatch.com/economics-theory/purchasing-power-parity-theory-of-exchange-rate.html>.