Tom-next definition

What is tom-next?

Tom-next (short for tomorrow-next day) is how forex speculators avoid taking physical delivery of currency while still keeping forex positions open overnight. 

Like commodities, forex trades would – if left unchecked – normally result in the trader taking delivery of the asset they have traded. In forex, the expected delivery day is two days after any transaction, but tom-next can be used to extend the trade beyond this date.

Instead of accepting delivery of the currency they have traded, the position is extended and the provider swaps any overnight positions for an equivalent contract that starts the next day. When calculated, the difference between these two contracts is the tom-next adjustment rate.

Tom-next and overnight funding

That tom-next adjustment is what will be used to calculate the overnight funding charge on a forex position, which you’ll have to pay if you keep your forex trade open for longer than a single day.  

Tom-next is calculated by adjusting the closing level of your open position with the interest rate of the currencies involved – rates can change daily as they are based on the underlying market price.

Tom-next calculation example

Let’s say you trade the EUR/USD cross by buying €100,000 and selling USD at a price of 1.2266. In order to keep your position open beyond the expected delivery date, you would need to sell your €100,000 on tomorrow’s date, and then buy it back at the new spot price.

The current price of your EUR/USD position is 1.2278/1.2279: that is, 1.2278 to sell and 1.2279 to buy. However, the new spot rate is one point higher at 1.22795/1.22805. To roll your position, you would be selling at 1.2278 and then buying back at 1.22805 – effectively paying 2.5 points.

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

Cost of carry

If you are buying a currency with a higher interest rate and then you receive an interest payment, if you are buying a currency with a lower interest rate, you have to pay interest. The payment is also known as cost of carry.

 

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