Tom-next definition

What is tom-next?

Tom-next is short for ‘tomorrow-next day’, which is the process of rolling a FX position from one spot day to the next. This is also known as the ‘cost of carry’ or the ‘financing adjustments’ associated with trading spot FX.

Instead of accepting delivery of the currency they have traded, the tom-next adjustment enables the position to be rolled over to the next day based on a specific tom-next rate.

Tom-next rates are derived from the cost required to borrow overnight the currency that is being notionally sold less any interest earned from depositing overnight the currency that is being notionally bought, market forces and expectations are also able to influence this rate.

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Example of tom-next

Let’s say that you decide to trade the EUR/USD pair – you open a position to buy €100,000 and sell USD at a price of 1.1366. In order to keep your position open beyond the expected delivery date, you would need to sell your €100,000 the following day (tomorrow’s date), and then buy it back at the new spot price.

The current price of your EUR/USD position is 1.1378/1.1379: that is, 1.1378 to sell and 1.1379 to buy. However, the new spot rate is one point higher at 1.13795/1.13805. To roll your position, you would be selling at 1.1378 and then buying back at 1.13805 – effectively paying 2.5 points.

In this example we would say that the tom-next rate is 0.5/2.5. And as a €100,000 EUR/USD trade is equivalent to $10/pt, rolling this position would cost 2.5 x $10 = $25 (plus a small admin fee).

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