The Law of One Price

The reason is simple. From the lower purchasing power parity formula, if the exchange rate is the same, the inflation rates of both countries must be equal. "In 1983 I was linked to the US dollar, but from 1985 to 1997 Hong Kong's annual inflation rate was 6% higher than in the US" (Imai, 1999, p. 1). Therefore, PPP may be rejected by empirical evidence provided by the author. PPP Official Source: (Hakkio, 1992, p. 50) To compare the universal purchasing power of various currencies, the Big Mac Index was created to gain insights about the purchasing power of various currencies around the world It was.

A price law is another way to explain the concept of purchasing power parity. Because there is opportunity for arbitrage trading, price has one law. If the price of a security, commodity, or asset differs in two different markets, the arbitrator will buy the asset in a cheaper market and sell it at a higher price. If purchasing power parity is not established, arbitrage trading profit will continue until price converges to market. Risk exposure can be defined as the actual value of the asset, the sensitivity of the liability or operating profit, and the unknown fluctuation of the exchange rate. Foreign exchange risk is the change in the value of the domestic currency of the asset and the operating profit of the liability due to unknown fluctuations at the exchange rate. Calculation

The price rule is a simple idea to understand how to determine the exchange rate. This means that the price of transportation costs and trade barriers is so low that the price of the same goods between the two countries must be the same worldwide, regardless of which country they are produced in. In addition, purchasing power parity theory (PPP) is the most famous theory to explain how to determine exchange rates. It pointed out that changes in the price level of both countries adjust the exchange rate between the two countries. However, although this theory provides some guidance on long-term exchange rate fluctuations, it is not perfect, it is inappropriate for predicting short-term exchange rates.

What is the factor determining the long-term exchange rate? Under the Price Law, we assume that in order for the market to be effective, all functionally equivalent products should be sold at price (Mishkin, 2007). This law is closely related to globalization and various free trade areas and markets. It is going to explain in the future that all countries and market sectors around the world receive the same number of jobs / services, products and their qualities (Mishkin, 2007).