Tomorrow Next, often abbreviated as Tom/Next, is a financial term used in currency trading to refer to the rollover of an open position from one business day to the next.
It is also known as “rollover interest” or “swap points“.
Let’s explore what Tomorrow Next means, why it is important, and how it is used in forex trading.
What is Tomorrow Next (Tom-Next)?
Tomorrow Next, or Tom-Next, refers to a short-term forex transaction in which a currency pair is simultaneously bought and sold with two different value dates.
The purchase is made for the following day’s delivery (tomorrow), and the sale is made for the next day’s delivery (next day).
When a trader holds a position in a currency pair overnight, they are subject to a rollover, which means that the position is automatically closed and reopened at the end of the trading day.
The rollover involves the simultaneous purchase and sale of the same currency pair, with the settlement date being the next business day.
The cost of the rollover is determined by the interest rate differential between the two currencies in the pair. If the interest rate on the currency being bought is higher than
the interest rate on the currency being sold, the trader will receive a credit on the rollover, and if the interest rate on the currency being sold is higher, the trader will pay a debit.
Tomorrow Next is the term used to describe the rate at which the rollover is executed.
It represents the difference between the spot rate of the currency pair and the forward rate for the next business day.
The forward rate is calculated using the interest rate differential and is adjusted for any market expectations or risk factors that may affect the currency pair.
Why is Tomorrow Next Important?
Tomorrow Next plays a vital role in forex trading for the following reasons:
- Rollover: Tom-Next transactions allow traders to maintain their forex positions for longer than one day without physically exchanging the currencies. This is particularly useful for speculative traders who have no interest in taking delivery of the currency but want to profit from its price movements.
- Interest Rate Differentials: When rolling over a forex position, traders need to account for the interest rate differentials between the two currencies involved. Tom-Next transactions factor in these differentials, ensuring that traders do not miss out on potential interest income or incur additional costs when holding a position overnight.
- Liquidity: Tomorrow Next transactions facilitate liquidity in the forex market by allowing traders to roll over their positions, reducing the need for physical delivery and settlement of currencies.
How is Tomorrow Next Used in Forex Trading?
Tom-Next transactions are used by forex traders in the following ways:
- Rollover Process: When a trader wishes to keep a position open beyond its settlement date, they can use a Tom-Next transaction to roll over the position to the next day. The trader simultaneously sells the currency pair for delivery on the following day and buys it back for the next day, effectively extending the position’s settlement date.
- Swap Rates: Forex brokers typically offer rollover rates, or swap rates, based on the interest rate differentials between the two currencies in a pair. These rates are influenced by Tom-Next transactions, as brokers use them to hedge their clients’ rollover positions in the interbank market.
- Carry Trade: In a carry trade strategy, a trader borrows a currency with a low-interest rate to fund the purchase of a currency with a higher interest rate. Tom-Next transactions help facilitate carry trades by allowing traders to roll over their positions and benefit from the interest rate differentials.
Summary
In summary, Tomorrow Next is a financial term used in currency trading to refer to the rollover of an open position from one business day to the next.
It is an important consideration for traders who hold positions overnight, as it can affect the profitability of the trade