Final answer:
Euro calls have a positive relationship with exchange rates, meaning as the value of the Euro increases, the value of Euro calls also tends to rise. A stronger Euro can affect economic agents in different ways based on their specific activities and engagements with other currencies. Expected appreciation of a currency may lead to higher demand for that currency and potentially lower yields on its government bonds.
Step-by-step explanation:
The question regards the positive relationship between Euro calls (options to buy Euros at a specific rate) and various economic indicators. Specifically, the correct answer is C. Exchange rates. Euro calls typically have a positive relationship with exchange rates, meaning as the value of the Euro increases relative to other currencies (appreciates), the value of Euro calls also rises. This happens because an increase in the value of the Euro can buy more of the foreign currency, in this case, Canadian dollars, which reduces the cost of investing in foreign bonds, such as Canadian government bonds.
As for the impacts of a stronger Euro, a British exporter to Germany might face challenges as their goods become more expensive in the Eurozone, a Dutch tourist visiting Chile would find their currency goes further, and a Greek bank investing in Canadian government bonds would see a reduction in costs. The French exporter to Germany would see no impact because both countries use the Euro.
If a country's currency is expected to appreciate, the impact on yields, such as the interest rate paid on government bonds, could be complex. Generally, if the expected exchange rate appreciates, the demand for that currency could increase as investors seek to benefit from the currency gain. This could possibly lead to a decrease in yields because there is a higher demand for the bonds, allowing the government to issue them at lower interest rates.