Key Takeaways
- Forex rollover swapping positions for next two days.
- Avoids physical currency delivery after spot date.
- Accounts for interest rate differences as swap points.
What is Tomorrow Next (Tom Next)?
Tomorrow Next, or Tom Next, is a short-term forex swap transaction that lets you roll over an open currency position from one business day to the next without physical delivery. It involves simultaneously buying and selling the same currency pair for settlement on consecutive days, adjusting for interest rate differences and market expectations.
This mechanism helps traders avoid the standard T+2 settlement rule while maintaining exposure to currency movements and swap interest, similar to how a financial obligation might be managed across accounting periods.
Key Characteristics
Tom Next features several essential aspects that facilitate overnight currency position management:
- Short-term swap: Involves buying and selling the same currency pair for delivery tomorrow and the next day to extend positions overnight.
- Interest rate adjustment: Reflects the cost of carry derived from interest rate differentials between the two currencies.
- Avoids physical delivery: Prevents actual currency exchange by rolling over positions, crucial for speculative traders.
- Automatic broker process: Brokers often handle the rollover automatically at market close, crediting or debiting your account accordingly.
- Market liquidity: Supports continuous forex market liquidity by enabling seamless position extension.
How It Works
At the end of each trading day, your broker will execute a Tom Next swap by simultaneously closing your open position for delivery tomorrow and reopening it for the day after. This process shifts the value date forward, maintaining your exposure without physical currency exchange.
The adjustment rate applied depends on the interest rates of the involved currencies, calculated from the difference between the spot and forward rates. If you hold the currency with the higher interest rate, you earn a positive rollover credit; otherwise, you pay a debit. This is similar in concept to maintaining balances in a T-account, where debits and credits adjust your position's value.
Examples and Use Cases
Tom Next is widely used by traders and institutions to manage overnight forex exposure and carry trades. Here are some typical scenarios:
- Currency carry trades: Holding a long position in a high-interest currency against a low-interest one to earn positive rollover interest.
- Corporate treasury: Companies like Delta use Tom Next to hedge currency risk without triggering physical settlement.
- Speculative trading: Retail traders extend positions overnight while avoiding delivery, benefitting from expected currency moves and swap rates.
- Investment portfolios: Combining Tom Next with growth-focused stocks such as those highlighted in the best growth stocks guide can diversify currency exposure and returns.
Important Considerations
While Tom Next provides an efficient way to roll over forex positions, you should monitor rollover costs closely, as they can impact overall profitability. Interest rate changes and market volatility may increase swap fees or credits unpredictably.
Ensure your broker transparently calculates and applies the rollover rates. Also, understanding how your exposure interacts with broader investment strategies, such as those involving bank stocks or managing international transactions using an IBAN, can help optimize your portfolio’s currency risks and returns.
Final Words
Tomorrow Next (Tom Next) allows you to extend forex positions overnight while accounting for interest rate differentials, avoiding physical currency delivery. To optimize your trading strategy, compare rollover rates across brokers and factor these costs into your position management.
Frequently Asked Questions
Tomorrow Next, or Tom Next, is a short-term forex swap where traders simultaneously buy and sell the same currency pair for delivery on consecutive business days. It allows traders to roll over open positions overnight without taking physical delivery of the currencies.
Traders use Tom Next swaps to avoid the physical delivery of currencies, which normally occurs two business days after a trade. This rollover lets them maintain their market exposure overnight while accounting for gains or losses from interest rate differences between the currencies.
At the end of the trading day, brokers automatically perform a Tom Next rollover by selling the currency pair for tomorrow’s delivery and buying it back for the next day. This shifts the settlement date forward, adjusting the position based on interest rate differentials.
The interest earned or paid depends on the interest rate difference between the two currencies. If you hold the currency with the higher interest rate, you receive a credit; if you hold the lower interest rate currency, you pay a debit.
The cost of carry refers to the gains or losses resulting from interest rate differences between the currencies in a position. Tom Next swaps incorporate this cost by adjusting the position's value through swap points based on these interest rate differentials.
Tom Next swaps are commonly used by retail and speculative traders who want to hold positions beyond one day without taking physical currency delivery. They are also essential for swing traders looking to manage overnight exposure efficiently.
The broker calculates the swap value based on interest rate adjustments and applies a credit or debit to your account depending on whether you are earning or paying interest. This adjustment reflects the cost or income from holding the position overnight.
