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 the 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.
Tom-next is calculated by adjusting the closing level of your open position with the 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.