huangxiaoxie

My understanding is the foreign currency risk premium is to account for the differences in risks associated with investing in foreign currency.

That is, there will be different default rates (higher default rates) relative to investing in the "risk-free rate" in your domestic (US) currency. I think, among others, we assume the US Treasury to be free of default, and every other country in the world to have varying degrees of default, all of which are higher. That plays a factor in the FCRP.

I recall other factors like political risk and economic instability playing a role in the FCRP.