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The law of one price states the prices of an identical asset or commodity will have the same price globally, regardless of location, when certain factors are considered including arbitrage and transportation (Olsen, 2015). In the global marketplace, these two issues are complicated by trade issues and multiple regulations in the various countries of trade.
Prices are transmitted over global markets but they are not transmitted equally. Also, some relationships are not mutually exclusive. Therefore, many areas may be seen as dominant while other areas may be seen as submissive in this equation (Rumankova, 2012). There are two ways to analyze the price transmission both vertically and horizontally. At the horizontal level, the analysis may be evaluated by the question of the law of one price. The law of one price is often utilized in conjunction with international trade at the global level. This means that in most cases the pricing guidelines in different countries are scrutinized. Also, transactional costs are weighed heavily in foreign policy. The law of one price can be applied in the case of a single economy and in partial markets (Rumankova, 2012).
Olsen and Mjelde (2015) also find that the degree of integration varies among the markets with the degree being larger for markets that are in close proximity; markets between countries can be integrated; there appear to be no east-west split in the USA, rather only differences in the degree of integration between and within the two regions; and both excess supply and demand region are important in price discovery (Ziros, 2015). In other words, it ensures that obeys the Law of One Price. Thus, three cases demonstrate that the Law of One Price is false.
The Law of One Price (LOOP) is an economic theory that states after taking currency exchange into account, the price of comparable items in different marketplaces must be the same. The law primarily affects assets traded on financial exchanges. “In a normal market, the price of gold at any point in time will be the same in London and New York.” This principle is applied to investments and trade as well. “If the prices in the two markets differ, investors will profit immediately by buying in the market where it is cheap and selling in the market where it is expensive.” (Berk & DeMarzo, 2020) This is done to prevent buyers and sellers from manipulating the price of goods.
The Law of One Price is possible because of arbitrage. (Lagua, 2018)Arbitrage is “the practice of buying and selling equivalent goods or portfolios to take advantage of price difference.” (Berk & DeMarzo, 2020) The availability of arbitrage opportunities makes the law of one price true. Even after taking exchange rates into account, if there is a price differential in the case of any asset, security, or commodity, an arbitrager will buy the asset or security in a cheaper market and sell it in a market where the price is high for the same asset or security. This will help ensure arbitragers benefit without taking any risks. If such arbitrage conditions exist, a growing number of players will purchase assets on the lower market, raising demand relative to supply. This will allow arbitragers to benefit without taking any risks. If such arbitrage conditions exist, a growing number of players will purchase assets on the lower market, raising demand relative to supply. Hence, the Law of One Price is true.
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