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Mtwara Travel on Prices in both markets will continue to move as long as the price in New York is lower than the price in Los Angeles by more than $3. The process will stop when the price differential is only $3, as there is no opportunity for arbitrage and thus no pressure on prices to move. Note that in the real world opportunities like these do not exist for long as arbitrageurs are constantly on the lookout for them. In the above example, if you further assume that there is no cost of undertaking this trade, and there are no other trade barriers, then you should expect the same price to prevail in both markets. This is the law of one price: prices move in markets based on supply and demand conditions until there is no opportunity for arbitrage and one price prevails. The law of one price and the concept of arbitrage carry over to financial markets as well. If you look at price of a share of stock of GENERAL MOTORS on the NEW YORK STOCK EXCHANGE and London Stock Exchange, you will see almost the same price in both markets because the share of stock is identical, and trading costs are very low in financial markets. Mtwara Travel 2016.

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