Both terms are very easy to understand. Lets understand them with the help of examples. First lets talk about futures. Suppose A wants to buy a house from B. The present cost of house is $10,000. now lets assume that today B is not intrested in selling house but he is ready to sell it after an year(say in march 2010). So A makes a contract with B that he will buy house from B after an year i.e on march 20,2010 at a particular price,fixed today. So,even if the price of house goes up from $10,000 to $15,000 by march 2010,A will pay only promised price (say $10,000). Now,the question is,if B knows that the price of house is gonna increase by march 2010,why he is selling house to A at a low price?And on what basis price will be fixed?The answer to this lies in the fact that market is volatile,if prices can go up,there is every probability of these coming down too(see what happened in U.S). Now,how price is fixed?B knows that if he gets $10,000 today from A,he can put it in a bank and can earn interest on that(say 10% interest).So,this way he can earn $11,000 in toto. So,the price that he will fix with A would be $11.000 and not $10,000.In this way he can do away with the losses. This will be beneficial for A also because if the price of house increase in one year to $15,000,then its better to pay $11.000 instead.
Now,if we talk about options,we should realise that there is very thin line that separates futures from options. In options,there is no compulsion on A to go on with the deal and execute it in march 2010. But in future,A has to abide by the deal and execute it in march 2010,i.e he cannot back off. So,suppose A visited the house that he is gonna buy,on january 25 2010 and found that it is haunted.No way he can risk his life and so he decides not to buy it. In this way he can back off from the deal that is due on march 20,2010. But in such a case A has to suffer a loss in the form of the premium that he initially paid to B. Reckon that A paid $1000 to B while making the deal,he wont get this amount back while breaking the deal. In this case both parties can save themselves from suffering losses because anyways the house is haunted and not gonna bring benefits for anyone( A lost $1000 but he saved himself from further losses because it would have been impossible for him to resale that house. Same way,B got atleast $1000 instead of nothing).
