With regard to exchange rate determination, the law of one price is a useful theory only when applied to:
A) long-run periods of time.
B) forward exchange rates.
C) very short-run periods of time.
D) futures contracts.

Question

Quizplus · Accepted Answer

The law of one price is a useful theory only when applied to long-run periods of time. In the short run, other factors such as market sentiment and speculation can greatly influence exchange rates. In the long run, however, the law of one price tends to hold true as arbitrage opportunities arise and trade imbalances correct themselves. Forward exchange rates, futures contracts, and very short-run periods of time may be subject to other market factors and are not as reliable in predicting long-term exchange rate trends.

With Regard to Exchange Rate Determination, the Law of One