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The three essays of this dissertation examine the effects of expected jumps in exchange rates and of covariance nonstationarity on foreign currency option pricing models and on tests of international asset pricing models. The first essay is a critical survey of empirical tests of the uncovered interest parity model, the portfolio balance model, the international capital asset pricing model (ICAPM), and the latent-variable ICAPM, with an emphasis on the importance for tests of assumptions about exchange rate distributions. I conclude that predictable international return differentials are too large to be explained by current theoretical models of risk premiums, even after accounting for the effects of covariance nonstationarity on such premiums. I hypothesize that the predictable return differentials reflect fears of a crash in the dollar.