Can someone explain this equation… (1 + Rf - D)/(U - D)
Nope
That is the formula for calculating the up-probability in a binomial tree. What would you like explained?
Neutral risk probability for the binomial option pricing model.
This is the risk-neutral probability from the binomial model of a European option. Option prices are determined by arbitrage considerations, not by their expected payoffs (similar to forwards and futures in that way). If, despite this, you decide to beat on the algebraic expression for the value of the option so that it *looks like* an expected payoff, your formula is what appears in place of p (the probability of an up move in the underlying). Don’t sweat trying to get an intuition for it.
It describes the stochastic motion of Rosario Dawson’s hands as she gives me a back rub. Sorry, my mind is wandering.