This chapter discusses the relative usefulness and shortcomings of employing purchasing power parity (PPP) in foreign‐exchange analysis. In order to obtain a solid grasp of the concept of PPP, it is necessary to first understand the law of one price. Economists often use PPP to ascertain the fundamental value in foreign‐exchange markets between two currencies. It asserts that the exchange rate between any two currencies will adjust in light of changes in the price levels of the two home countries of the units of exchange. Inside the investment community most economists and foreign‐exchange analysts use some variation of PPP to derive what they consider to be a reliable and robust estimate of the fair value of exchange rates. Due to the limitations of the absolute version of PPP, some analysts rely on a bounded version that focuses on price changes as opposed to a singular emphasis on absolute price levels.