What is the Law of One price? According to Investopedia, The Law of One price is the theory that the price of securities, commodities or assets will have the same price when exchange rates are taken into consideration or arbitrage opportunities will exist if there are two different prices in two different markets until parity exists. According to Professor Karl Gunnar, University of Copenhagen in an efficient market their must only be one price regardless of where they are traded, but very short violation of the law will exist because there are always local shocks that take time to be recognized across all the markets. In the local shocks is where arbitrage opportunities lie in the delay of recognizing the differences between efficient markets to those markets that may be less efficient or the technologies are less developed. Smart arbitragers will make the most of this opportunity buying low and selling high in other markets until parity is reached.

For example the trade of gold today has dropped from $1127 to $1126.67 an ounce. The efficient markets would recognize the price shift and would hold supplies of gold to make the supply available in the world drop and the price go up. The smart arbitrager would look for any markets where the price may have not changed as quickly to possibly capitalize on arbitrage opportunities by selling the gold at the higher price, and buying gold at the lower price and selling it at a higher price in the market that did not recognize the price shift. According to Professor Karl Gunnar Commodity markets such as the gold market will only have short and transistor violations of the Law of One Price. This is because of the information technologies used in these markets will recognize price changes in one markets and will reflect price changes in another because of inventories adjustments. The economic forces of supply and demand will meet at an equilibrium price based on adjustments of supply.

The Law of One Price always strives for prices to be at equilibrium across all markets but where there is a lag arbitrage opportunities will exist. The more localized the market the more opportunity for delays in the market recognizing the shift. For example we can look at the Pork trade that is traded in the Chicago Mercantile Exchange and look at how companies shift inventory or production based on the price of pork. For example the three major pork processors Smithfield foods, Tyson Foods, and Brazilian JBS SA, are the three largest pork processors in the US market according to Wikinvest. These companies benefit from higher pork prices, and may elect to hold inventories when prices are down to control their profits. In the event that they hold inventories to raise prices the effect of this may not be recognized in markets in China right away and arbitrage opportunities may arises.

Works Cited

1. Investopedia (http://www.investopedia.com/terms/i/ife.asp).

2. Persson, Karl. "Law of One Price". EH.Net Encyclopedia, edited by Robert Whaples. February 10, 2008. URL http://eh.net/encyclopedia/article/persson.LOOP

3. Gold Price http://www.goldprice.org/

4. Wikinvest http://www.wikinvest.com/commodity/Pork