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Law of one price

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Definition of Law of one price

Law Of One Price Image 1

Law of one price

An economic rule stating that a given security must have the same price regardless of the
means by which one goes about creating that security. This implies that if the payoff of a security can be
synthetically created by a package of other securities, the price of the package and the price of the security
whose payoff it replicates must be equal.


law of one price

Theory that prices of goods in all countries should be equal when translated to a common currency.



Related Terms:

All or none

Requirement that none of an order be executed unless all of it can be executed at the specified price.


All-or-none underwriting

An arrangement whereby a security issue is canceled if the underwriter is unable
to re-sell the entire issue.


Arm's length price

The price at which a willing buyer and a willing unrelated seller would freely agree to
transact.


Ask price

A dealer's price to sell a security; also called the offer price.



At-the-money

An option is at-the-money if the strike price of the option is equal to the market price of the
underlying security. For example, if xyz stock is trading at 54, then the xyz 54 option is at-the-money.


Bargain-purchase-price option

Gives the lessee the option to purchase the asset at a price below fair market
value when the lease expires.


Law Of One Price Image 2

Basis price

price expressed in terms of yield to maturity or annual rate of return.


Bid price

This is the quoted bid, or the highest price an investor is willing to pay to buy a security. Practically
speaking, this is the available price at which an investor can sell shares of stock. Related: Ask , offer.


Blue-sky laws

State laws covering the issue and trading of securities.


Call money rate

Also called the broker loan rate , the interest rate that banks charge brokers to finance
margin loans to investors. The broker charges the investor the call money rate plus a service charge.


Call price

The price, specified at issuance, at which the issuer of a bond may retire part of the bond at a
specified call date.


Call price

The price for which a bond can be repaid before maturity under a call provision.


Clean price

Bond price excluding accrued interest.


Component

Raw materials or subassemblies used to make either finished goods
or higher levels of subassembly.


Consumer Price Index (CPI)

The CPI, as it is called, measures the prices of consumer goods and services and is a
measure of the pace of U.S. inflation. The U.S.Department of Labor publishes the CPI very month.


Law Of One Price Image 3

Consumer Price Index (CPI)

An index calculated by tracking the cost of a typical bundle of consumer goods and services over time. It is commonly used to measure inflation.


Conversion parity price

Related:Market conversion price



Convertible price

The contractually specified price per share at which a convertible security can be
converted into shares of common stock.


Delivery price

The price fixed by the Clearing house at which deliveries on futures are in invoiced; also the
price at which the futures contract is settled when deliveries are made.


Devaluation A decrease in the spot price of the currency



Dirty price

Bond price including accrued interest, i.e., the price paid by the bond buyer.


Dividend clawback

With respect to a project financing, an arrangement under which the sponsors of a project
agree to contribute as equity any prior dividends received from the project to the extent necessary to cover
any cash deficiencies.


Dollar price of a bond

Percentage of face value at which a bond is quoted.


Dow Jones industrial average

This is the best known U.S.index of stocks. It contains 30 stocks that trade on
the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest
U.S.companies are performing. There are thousands of investment indexes around the world for stocks,
bonds, currencies and commodities.


Dow Jones Industrial Average

Index of the investment performance of a portfolio of 30 “blue-chip” stocks.


economic components model

Abrams’ model for calculating DLOM based on the interaction of discounts from four economic components.
This model consists of four components: the measure of the economic impact of the delay-to-sale, monopsony power to buyers, and incremental transactions costs to both buyers and sellers.


Law Of One Price Image 4

Effective call price

The strike price in an optional redemption provision plus the accrued interest to the
redemption date.



Equilibrium market price of risk

The slope of the capital market line (CML). Since the CML represents the
return offered to compensate for a perceived level of risk, each point on the line is a balanced market
condition, or equilibrium. The slope of the line determines the additional return needed to compensate for a
unit change in risk.


Escalating Price Option

A nonqualified stock option that uses a sliding scale for
the option price that changes in concert with a peer group index.


European Monetary System (EMS)

An exchange arrangement formed in 1979 that involves the currencies
of European Union member countries.


Exercise price

The price at which the underlying future or options contract may be bought or sold.


Exercise price

The price set for buying an asset (call) or selling an asset (put).
The strike price.


Fair market price

Amount at which an asset would change hands between two parties, both having
knowledge of the relevant facts. Also referred to as market price.


Fair price

The equilibrium price for futures contracts. Also called the theoretical futures price, which equals
the spot price continuously compounded at the cost of carry rate for some time interval.


Fair price provision

See:appraisal rights.


Fiat Money

Fiat Money is paper currency made legal tender by law or fiat. It is not backed by gold or silver and is not necessarily redeemable in coin. This practice has had widespread use for about the last 70 years. If governments produce too much of it, there is a loss of confidence. Even so, governments print it routinely when they need it. The value of fiat money is dependent upon the performance of the economy of the country which issued it. Canada's currency falls into this category.


Fixed price basis

An offering of securities at a fixed price.


Fixed-price tender offer

A one-time offer to purchase a stated number of shares at a stated fixed price,
usually a premium to the current market price.


Flat price (also clean price)

The quoted newspaper price of a bond that does not include accrued interest.
The price paid by purchaser is the full price.


Flat price risk

Taking a position either long or short that does not involve spreading.


Full price

Also called dirty price, the price of a bond including accrued interest. Related: flat price.


Futures price

The price at which the parties to a futures contract agree to transact on the settlement date.


Goodhart's Law

Whatever measure of the money supply is chosen for application of the monetarist rule will soon begin to misbehave.


High-Powered Money

See money base.


High price

The highest (intraday) price of a stock over the past 52 weeks, adjusted for any stock splits.


Hot money

Money that moves across country borders in response to interest rate differences and that moves
away when the interest rate differential disappears.


In-the-money

A put option that has a strike price higher than the underlying futures price, or a call option
with a strike price lower than the underlying futures price. For example, if the March COMEX silver futures
contract is trading at $6 an ounce, a March call with a strike price of $5.50 would be considered in-the-money
by $0.50 an ounce.
Related: put.


International Monetary Fund

An organization founded in 1944 to oversee exchange arrangements of
member countries and to lend foreign currency reserves to members with short-term balance of payment
problems.


International Monetary Fund (IMF)

Organization originally established to manage the postwar fixed exchange rate system.


International Monetary Market (IMM)

A division of the CME established in 1972 for trading financial
futures. Related: Chicago Mercantile Exchange (CME).


Invoice price

The price that the buyer of a futures contract must pay the seller when a Treasury Bond is delivered.


Law of large numbers

The mean of a random sample approaches the mean (expected value) of the
population as the sample grows.


Limit price

Maximum price fluctuation
Limitation on asset dispositions A bond covenant that restricts in some way a firm's ability to sell major
assets.


Limit price

Maximum price fluctuation


Low price

This is the day's lowest price of a security that has changed hands between a buyer and a seller.


Low price-earnings ratio effect

The tendency of portfolios of stocks with a low price-earnings ratio to
outperform portfolios consisting of stocks with a high price-earnings ratio.


Market conversion price

Also called conversion parity price, the price that an investor effectively pays for
common stock by purchasing a convertible security and then exercising the conversion option. This price is
equal to the market price of the convertible security divided by the conversion ratio.


Market price of risk

A measure of the extra return, or risk premium, that investors demand to bear risk. The
reward-to-risk ratio of the market portfolio.


Market prices

The amount of money that a willing buyer pays to acquire something from a willing seller,
when a buyer and seller are independent and when such an exchange is motivated by only commercial
consideration.


Marketplace price efficiency

The degree to which the prices of assets reflect the available marketplace
information. Marketplace price efficiency is sometimes estimated as the difficulty faced by active
management of earning a greater return than passive management would, after adjusting for the risk
associated with a strategy and the transactions costs associated with implementing a strategy.


material price variance

total actual cost of material purchased
minus (actual quantity of material  standard
price); it is the amount of money spent below (favorable)
or in excess (unfavorable) of the standard price for the
quantity of materials purchased; it can be calculated based
on the actual quantity of material purchased or the actual
quantity used


Materials price variance

The difference between the actual and budgeted cost to
acquire materials, multiplied by the total number of units purchased.


Maximum price fluctuation

The maximum amount the contract price can change, up or down, during one
trading session, as fixed by exchange rules in the contract specification. Related: limit price.


Minimum price fluctuation

Smallest increment of price movement possible in trading a given contract. Also
called point or tick. The zero-beta portfolio with the least risk.


Monetarism

School of economic thought stressing the importance of the money supply in the economy. Adherents believe that the economy is inherently stable, so that policy is best undertaken through adoption of a policy rule.


Monetarist Rule

Proposal that the money supply be increased at a steady rate equal approximately to the real rate of growth of the economy. Contrast with discretionary policy.


Monetary Aggregate

Any measure of the economy's money supply.


Monetary Base

See money base.


Monetary gold

Gold held by governmental authorities as a financial asset.


Monetary / non-monetary method

Under this translation method, monetary items (e.g. cash, accounts
payable and receivable, and long-term debt) are translated at the current rate while non-monetary items (e.g.
inventory, fixed assets, and long-term investments) are translated at historical rates.


Monetary policy

Actions taken by the Board of Governors of the Federal Reserve System to influence the
money supply or interest rates.


Monetary Policy

Actions taken by the central bank to change the supply of money and the interest rate and thereby affect economic activity.


Monetizing the Debt

See printing money.


Money

Any item that serves as a medium of exchange, a store of value, and a unit of account. See medium of exchange.


Money base

Composed of currency and coins outside the banking system plus liabilities to the deposit money banks.


Money Base

Cash plus deposits of the commercial banks with the central bank.


Money center banks

Banks that raise most of their funds from the domestic and international money markets, relying less on depositors for funds.


Money Laundering

This is the process by which "dirty money" generated by criminal activities is converted through legitimate businesses into assets that cannot be easily traced back to their illegal origins.


Money management

Related: Investment management.


Money manager

Related: Investment manager.


Money market

Money markets are for borrowing and lending money for three years or less. The securities in
a money market can be U.S.government bonds, treasury bills and commercial paper from banks and
companies.


Money Market

A market that specializes in trading short-term, low-risk, very liquid
debt securities


money market

Market for short-term financial assets.


Money Market

A financial market in which short-term (maturity of less than a year) debt instruments such as bonds are traded.


Money Market

Financial market in which funds are borrowed or lent for short periods. (The money market is distinguished from the capital market, which is the market for long term funds.)


Money market demand account

An account that pays interest based on short-term interest rates.


Money market fund

A mutual fund that invests only in short term securities, such as bankers' acceptances,
commercial paper, repurchase agreements and government bills. The net asset value per share is maintained at
$1. 00. Such funds are not federally insured, although the portfolio may consist of guaranteed securities
and/or the fund may have private insurance protection.


money market fund

A type of mutual fund that invests primarily in short-term debt securities maturing in one year or less. These include treasury bills, bankers’ acceptances, commercial paper, discount notes and guaranteed investment certficates.


Money market hedge

The use of borrowing and lending transactions in foreign currencies to lock in the
home currency value of a foreign currency transaction.


Money market notes

Publicly traded issues that may be collateralized by mortgages and MBSs.


Money Multiplier

Change in the money supply per change in the money base.


money order

A guaranteed form of payment in amounts up to and including $5,000. You might request a money order in order to pay for tuition fees at a university or a college, or for a magazine subscription.


Money purchase plan

A defined benefit contribution plan in which the participant contributes some part and
the firm contributes at the same or a different rate. Also called and individual account plan.


Money Rate of Interest

See interest rate, nominal.


Money rate of return

Annual money return as a percentage of asset value.


Money supply

M1-A: Currency plus demand deposits
M1-B: M1-A plus other checkable deposits.
M2: M1-B plus overnight repos, money market funds, savings, and small (less than $100M) time deposits.
M3: M-2 plus large time deposits and term repos.
L: M-3 plus other liquid assets.


negotiated transfer price

an intracompany charge for goods
or services set through a process of negotiation between
the selling and purchasing unit managers


Neutrality of Money

The doctrine that the money supply affects only the price level, with no long-run impact on real variables.



 

 

 

 

 

 

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