Tom-Next
Tue, Apr 15Tom-Next stands for 'Tomorrow-Next Day' and refers to a short-term forex transaction that allows traders to buy and sell a currency over two different business days: tomorrow and the following day.
The purpose of Tom-Next is to enable traders to maintain their forex positions overnight without having to take physical delivery of the currency. Typically, forex trades would require the trader to accept delivery of the asset involved.
Tom-Next transactions occur because most currency traders do not intend to take delivery of the currency, necessitating the daily "rollover" of their positions. In forex, the expected delivery date is two days after any transaction, known as the spot date, but Tom-Next can be utilized to extend the trade beyond this date.
This simultaneous transaction is classified as an FX swap, and depending on the currency held by the trader, they may either incur a charge or earn a premium. Instead of taking delivery of the traded currency, Tom-Next allows the position to be extended, with the trader's forex broker swapping any overnight positions for an equivalent contract that commences the next day.
The difference between these two contracts is referred to as the Tom-Next adjustment rate. Tom-Next is calculated by adjusting the closing level of your open position with the interest rate; if you receive an interest payment, it indicates a favorable position, while buying a currency with a lower interest rate would result in an interest payment.
This payment is commonly known as the "cost of carry."
For instance, if you trade the EUR/USD by purchasing €100,000 and selling USD at a rate of 1.1266, you would need to sell your €100,000 on the following day and then buy it back at the new spot price to keep your position open beyond the expected delivery date.
The current price of your EUR/USD position is 1.1278/1.1279, meaning it costs 1.1278 to sell and 1.1279 to buy. However, the new spot rate is higher at 1.12795/1.12805.
To roll your position, you would sell at 1.1278 and then buy back at 1.12805, effectively paying 2.5 pips. In this scenario, we would state that the Tom-Next rate is 0.5/2.5.
Since a €100,000 EUR/USD trade is equivalent to $10 per pip, rolling this position in the market would cost 2.5 x $10 = $25 (plus a small administrative fee).
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