Tom-next definition

What is tom-next?

Tom-next is short for ‘tomorrow-next day’, which is a short-term forex transaction that enables traders to simultaneously buy and sell a currency over two separate business days: tomorrow, and the next day.

The intention of tom-next is to prevent traders having to take physical delivery of currency, while still being able to keep their forex positions open overnight. Like commodities, forex trades would 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, known as the spot date, but tom-next can be used to extend the trade beyond this date.

Instead of accepting delivery of the currency they have traded, tom-next enables the position to be 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.

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That tom-next adjustment will be used to calculate the overnight funding charge on a forex position, which you will have to pay if you want to 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.

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

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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