Does the Underlying Asset’s Liquidity Affect the Liquidity of Its Cash-Settled Future?

Yes, the liquidity of the underlying asset significantly influences the liquidity of its cash-settled future. A highly liquid spot market provides reliable price discovery, which is essential for the futures contract's valuation and settlement mechanism.

If the underlying spot market is illiquid, the futures price may be less reliable, increasing basis risk and discouraging participation, thus reducing the futures contract's own liquidity.