Tomorrow Next (Tom Next)

Definition

Tomorrow Next (Tom Next) is a phrase used in foreign exchange trading to denote a short-term forex transaction where a currency is simultaneously bought and sold for delivery on the next two business days. It allows traders to effectively skip the standard one business day settlement period (or “value date”) that comes with most forex trades. This enables them to avoid taking actual delivery of the currency, and instead, they move their speculative position to the next settlement date.

Phonetic

The phonetics for “Tomorrow Next (Tom Next)” would be:/təˈmɔːrəʊ nekst/ (Tom Next)

Key Takeaways

1. Tomorrow Next (Tom Next) is a foreign exchange (FX) transaction where a currency pair is bought or sold with a settlement date of one day in advance (tomorrow), and then reversed the next day (next). This is essentially done for the simultaneous buying and selling of a currency pair.
2. It is primarily used by currency traders to prevent having to take actual delivery of the currency, and it also enables investors to take advantage of the differences in interest rates between two countries. The Tom Next transaction, therefore, removes the requirement for a physical currency transaction.
3. Lastly, the Tom Next transaction is the most common method that allows FX dealers to roll over their trading position to the next trading day without having to deal with deliveries. This also aids in maintaining liquidity and minimizing risks in forex markets.

Importance

The business and finance term “Tomorrow Next” (Tom Next) is a critical concept used in the forex market, representing a short-term foreign exchange transaction. It denotes a transaction where the currency is sold and then bought back again for delivery the day after the following business day. This quick turnaround facilitates seamless and constant forex trading, allowing traders to avoid taking actual delivery of the currency and essentially “rolling over” their position. This arrangement is crucial as forex trading primarily focuses on speculating on price movements, not actual physical delivery of currencies. By employing Tom Next, traders can maintain their speculative positions, making it integral to daily forex operations and overall market liquidity.

Explanation

Tomorrow Next, often abbreviated as Tom Next, is a term used predominantly in the foreign exchange (Forex) market. Tom Next plays a crucial role in facilitating the smooth continuation of certain Forex trades beyond the standard two-day settlement period. This is particularly useful for traders who intend to keep their trading positions open for more than a standard two business day period, allowing them to avoid the actual delivery of the currency.The basic purpose of Tom Next is to enable traders to extend the settlement period of a spot Forex trade to a future date. The process involves simultaneously closing a spot position for one day and then reopening it for the following day, thus extending the settlement date by another day. This ensures that traders can maintain their position without having to take delivery of the currency, which is an aspect of the Forex market that most traders don’t want to deal with. Moreover, by incorporating the interest rate difference between the two currencies involved, Tom Next calculations also enable traders to account for the cost of holding the position through the extended settlement period.

Examples

1. Foreign Exchange Markets: Perhaps the most common use of the term “Tomorrow Next” (Tom Next) is within the foreign exchange markets. Here, traders use this term to describe a transaction where they agree to buy or sell a currency with delivery agreed for the day after tomorrow. For example, a Forex trader may buy a certain amount of US dollars against euros with a Tom Next deal. The trader is expecting that the US dollar will strengthen against the euro within the next day. They would then sell their US dollars the day after the next and profit from the exchange rate difference.2. Brokerage Firms: Brokerages can use the Tom Next mechanism to roll over an open Forex position to the next trading day. Suppose a brokerage firm carries open positions in Forex trading until the end of the day. However, clients may not be ready to close their positions yet. The firm can rollover these positions to the next trading day using a Tom Next swap. Essentially, the firm borrows the security on a short-term basis and promises to return the security the day after tomorrow.3. Investment Banks: Suppose an investment bank is working on a significant currency transaction that is set to finalize in a couple of days. The bank might simultaneously enter into a Tom Next contract to cover a Forex risk they have in the same currency pair. The bank is hedging its risk by arranging to trade the same quantity of currency on the markets the day after the main transaction takes place. Depending on currency movements, this may result in a profit for the bank or offset any loss from the main transaction.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Spot Forex
• Swap Transaction
• Forward Contract
• Settlement Date
• Foreign Exchange Market

Sources for More Information

• Investopedia
• Financial Dictionary
• Collins Dictionary
• Corporate Finance Institute