The forward rate is the time-t certainty equivalent of future spot rates -elucidate

a. Mexican interest rates are normally substantially higher than U.S. interest rates. What does this imply about the forward rate as a forecast of the future spot rate?

b. Does the forward rate reflect a forecast of appreciation or depreciation of the Mexican peso? Explain how the degree of the expected change implied by the forward rate forecast is tied to the interest rate differential.

c. Do you think that today’s forward rate or today’s spot rate of the peso would be a better forecast of the future spot rate of the peso.

30. The Bull Company, a lawn mower manufacturer, is considering the introduction of a new model. The initial outlay required is $22 million. Net cash flows over the 4-year life cycle and the corresponding certainty-equivalents of the new model are as follows:

Year Net Cash Flow Certainty-equivalent Factor
1 $15 million 0.90
2 $13 million 0.75
3 $11 million 0.55
4 $ 9 million 0.30

The firm's cost of capital is 14% and the risk-free rate is 6%. Bull uses the certainty-equivalent approach in evaluating above-average risk investments such as this one. What is the project's certainty-equivalent NPV?

A. $20,083,000.28
B. $6,631,663.90
C. $13,905,000.72
D. $3,019,400.20

How do you calculate the monetary certainty equivalent