It refers to a condition where two securities are of equal value. The term parity is frequently applied in the economic market when dealing with bonds, stock, and currency exchange rates.
The parity occurs in the financial market when all brokerage firms or dealers bidding for the same security or currency have equivalent standing due to identical bids. When equality occurs, the winning proposal is usually granted by a random draw.
The best example of parity is in foreign exchange markets (forex). Equality occurs when the currencies exchange rate connection is accurately one to one. The U.S. based companies that have an operation in foreign countries usually convert United State dollar into other currencies.
For example, if U.S. based company operates in France can convert United State dollar into euros to runs French business. If the exchange rate between the U.S. dollar and Euro is one to one, the currencies are at parity.
The purchasing power parity method is used to compare the power of purchasing between countries. It compares the price of goods and services in one country with the cost of the same goods and services in another country. The purchasing power parity main aim is to adjust the prices of the same goods between the countries.
For example, if a product such as iPhone cost $700 in the United States, and in Great Britain, the exchange rate of U.S. dollar to Great British pound is $1.40 (it cost $1.40 for each British pound). So in Great Britain, if the iPhone costs approximately 500 British pounds, then we can say that there is purchasing power parity since 500 British pound equals $700 at the exchange rate of $1.40.