How do derivatives increase liquidity?

CFA Level I Derivatives
#1

I am not sure what this means. Does it just mean that liquidity is increased because derivatives make it easy to bet on assets that are otherwise impossible to trade liquidly like oil and coal?

#2

“Bet on” is a harsh phrase, but that’s it, essentially.

Derivatives are less expensive than buying the underlying, and many (options and futures, in particular) are extremely liquid. Furthermore, they allow investors to take advantage of both bullish and bearish sentiment, far more easily (bearish, in particular) than can be done with direct investment in the underlying.

#3

Thank you for the extremely clear answer! Much appreciated

#4

My pleasure.