Tomorrow Next (Tom Next)

What Is Tomorrow Next (Tom Next)?

Tomorrow next (tom next) is a short-term foreign exchange (forex) transaction where a currency is simultaneously bought and sold more than two separate business days: those being tomorrow (in one business day) and the next day (two business days from today).

The point of a tom next transaction is to permit traders and investors to maintain their position without being forced to take physical delivery. Tom next transactions are likewise important in commodities derivatives markets, although this terminology isn't often utilized there.

Understanding Tomorrow Next (Tom Next)

In most currency trades, delivery is two days after the transaction date (T+2). Tom-next trades emerge in light of the fact that most currency traders have zero desire to take delivery of the currency thus require their positions to be "rolled over" consistently.

This simultaneous transaction is a FX swap, and contingent upon 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 better rate (insignificant) due to the interest rate differential. This differential is known as the cost of carry.

On the off chance that the two currencies have identical interest rates, they will be swapped at a similar rate.

The actual transactions of tom-next trades are effected by dealers in the interbank market. Contingent upon their transaction direction, the trader will either "trade" or "sell and purchase" the currency they are rolling over. A tom-next transaction is generally dealt with by the advances trading desk or the STIR (short-term interest rate) team.

In the event that a trader decides not to roll over their position, they will be forced to take physical delivery of that currency. Furthermore, on the grounds that this is rarely the case, a tom-next transaction is essentially the extension of a trader's position.

The principle of rolling a position over is maybe even more important in commodities trading since, supposing that it isn't done a trader would be required to take delivery of the underlying commodity at expiration.

Illustration of Tomorrow Next (Tom Next)

A trader is long on the EUR/USD pair, which is trading at $1.53 (1 euro purchases 1.53 US dollars) on its expiration date. The trader issues a tom-next instruction to continue holding onto the pair. Assume the swap interest rates for the pair are in the scope of 0.010 to 0.015.

At the finish of the trading day, after the 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 next day.

Highlights

• A trader can roll over their position to the next and next (i.e., two days later) business days to abstain from taking delivery and holding onto the currency simultaneously.
• A tom next transaction can be executed through a dealer's forex or STIR desk.
• Tomorrow next alludes to the rolling over of a position in the currency markets to postpone delivery.