Tomorrow Next
Tue, Apr 15Tomorrow Next, often abbreviated as Tom/Next, is a financial term in currency trading that refers to the rollover of an open position from one business day to the next. It is also known as “rollover interest” or “swap points.” Let’s explore what Tomorrow Next means, why it is important, and how it is used in forex trading.
Tomorrow Next, or Tom-Next, describes a short-term forex transaction where a currency pair is simultaneously bought and sold with two different value dates. The purchase is made for delivery the following day (tomorrow), while the sale is for delivery the next day (next day).
When a trader holds a position in a currency pair overnight, they are subject to a rollover, meaning the position is automatically closed and reopened at the end of the trading day. This rollover involves the simultaneous purchase and sale of the same currency pair, with the settlement date set for the next business day.
The cost of the rollover is influenced by the interest rate differential between the two currencies in the pair. If the interest rate on the currency being bought is higher than that of the currency being sold, the trader will receive a credit on the rollover. Conversely, if the interest rate on the currency being sold is higher, the trader will incur a debit.
Tomorrow Next refers to the rate at which the rollover is executed, representing the difference between the spot rate of the currency pair and the forward rate for the next business day. The forward rate is calculated based on the interest rate differential and is adjusted for any market expectations or risk factors that may impact the currency pair.
Tomorrow Next is crucial in forex trading for several reasons:
- Rollover: Tom-Next transactions enable traders to maintain their forex positions for more than one day without the need for physical currency exchange. This is especially beneficial for speculative traders who aim to profit from price movements without taking delivery of the currency.
- Interest Rate Differentials: When rolling over a forex position, traders must consider the interest rate differentials between the two currencies involved. Tom-Next transactions account for these differentials, ensuring traders do not miss out on potential interest income or incur extra costs when holding a position overnight.
- Liquidity: Tomorrow Next transactions enhance liquidity in the forex market by allowing traders to roll over their positions, minimizing the need for physical delivery and settlement of currencies.
Tom-Next transactions are utilized by forex traders in the following ways:
- Rollover Process: When a trader wants to keep a position open beyond its settlement date, they can use a Tom-Next transaction to roll over the position to the next day. The trader simultaneously sells the currency pair for delivery the following day and buys it back for the next day, effectively extending the position’s settlement date.
- Swap Rates: Forex brokers typically provide rollover rates, or swap rates, based on the interest rate differentials between the two currencies in a pair. These rates are influenced by Tom-Next transactions, as brokers use them to hedge their clients’ rollover positions in the interbank market.
- Carry Trade: In a carry trade strategy, a trader borrows a currency with a low-interest rate to purchase a currency with a higher interest rate. Tom-Next transactions facilitate carry trades by allowing traders to roll over their positions and benefit from the interest rate differentials.
In summary, Tomorrow Next is a financial term in currency trading that refers to the rollover of an open position from one business day to the next. It is an essential consideration for traders holding positions overnight, as it can impact the trade's profitability.
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