What is Tomorrow Next - Tom Next?
Tomorrow next (tom next), is a short-term foreign exchange transaction where a currency is simultaneously bought and sold over two separate business days, those being tomorrow (one business day) and the following day (two business days from today), otherwise known as the spot date.
The point of the transaction is so traders and investors maintain their position and are not forced to take physical delivery.
Basics of Tomorrow Next - Tom Next
In most currency trades, delivery is two days after the transaction date. Tom-next trades arise because most currency traders have no intention of taking delivery of the currency so require their positions to be 'rolled-over' on a daily basis.This simultaneous transaction is an FX swap, and depending on what currency the person holds, they will either be charged or earn a premium. Those traders and investors holding high yielding currencies will roll it over at a more favorable rate (minimal) because of the interest rate differential. This differential is known as the cost of carry.
If the two currencies have identical interest rates then they will be swapped at the same rate.
The actual transaction of tom-next trades are done by banks in the interbank market. Depending on their transaction direction, the trader will either "buy and sell" or "sell and buy" the currency they are rolling over. A tom-next transaction is generally handled by the forwards trading desk or the STIR (short-term interest rate) team.
If a trader chooses not roll over their position they will be forced to take physical delivery of that currency. And because this is rarely the case, a tom-next transaction is essentially the extension of a traders position.
The principle of rolling a position over is even more important in commodities trading because if it is not done, a trader would be left with delivery of the underlying commodity.
- Tomorrow-Next refers to the rolling over of a position in the currency markets to postpone delivery. Thus, a trader can roll over their position to the next and next (i.e., two days later) business days to avoid taking delivery and holding onto the currency at the same time.
- A tom-next transaction is generally handled by the forwards trading desk or the STIR (short-term interest rate) team.
Example of Tom-Next
Suppose a trader is long on the EUR/USD pair, which is trading at $1.53 (1 euro buys 1.53 US dollars) on its expiration date. The trader issues a tom-next instruction to continue holding onto the pair. Suppose the swap interest rates for the pair are in the range of 0.010 to 0.015. At the end of the trading day, after purchase and sale of shares, the trader is offered an interest rate of 0.010. The new price of the trader's position becomes $1.52 the following day.