I’m having trouble understanding the expected change in exchange rates formula with the countries’ various risk premia. For example, UIP would say expected appreciation of foreign currency is rd - rf: if the foreign currency has a higher interest rate, the currency is expected to depreciate. However, empirically I understand there is often a risk premium that results in the carry trade being profitable on average. I don’t understand the formula though, in the form rd-rf + risk premium-d - risk premium-f.
Doesn’t this assume that the foreign currency will depreciate more if it carries a higher risk premium, vs. the opposite being the case to incentivize investors to hold the riskier assets?